Miltonics Potions Ltd. (MPL) is a privately held Ontario corporation engaged in the development and marketing of patent medicines. In early 20X1 the company’s research chemists began working on a project to develop a patent remedy for colitis ( a disease that causes inflammation of the bowel). During the year, $ 200,000 was spent in research on this project without developing a useful product.
Work continued in 20X2, with an additional $ 100,000 being spent. By the end of 20X2, an apparently feasible product had been developed and was being considered by MPL’s top management for further development and exploitation. On February 14, 20X3 ( prior to completion and issuance of the 20X2 financial statements), the managers reached the decision to proceed with further development, production, and marketing of the product, barring adverse medical results (i. e., unacceptable side effects) from tests then underway. Such adverse results were possible, but were considered unlikely since nothing untoward had occurred to date in the testing program.
During 20X3, the product was refined and the mass production formulation was developed (at a cost of $ 150,000). Production facilities were prepared (at a cost of $ 300,000), and patent number 381– 1003- 86 was obtained on the product. Legal expenses totaled $ 32,000.
In early 20X4, production and distribution began. Sales in the first year were modest, totaling only $ 450,000. However, $ 500,000 was spent on promotion, mainly in print media advertising and in sending free samples to doctors and clinics. Only in 20X5 did the sales reach forecast levels, thereby indicating that MPL had a successful product.
However, the success of the product spawned an imitator and, in 20X5, MPL sued a competitor for patent infringement. MPL demanded that the competitor cease production and marketing of the competing product and requested $ 2,000,000 in damages. Legal costs of $ 50,000 were incurred in this action in 20X5; the case was still pending at the end of the year.
In July 20X6, after MPL had spent an additional $ 20,000 in legal fees, the case was dis-missed in court, thereby rendering MPL’s patent indefensible. Since the competitor was a well-known pharmaceutical firm, MPL’s sales suffered considerably from the competition.

a) On a year- by- year basis, describe the alternative accounting methods that MPL could use for the costs incurred in developing, patenting, and defending the new product. Do not use hindsight in arriving at your alternatives.
b) Explain what additional information you would need and what criteria you would use to make a decision on the alternative to adopt for each year.

  • CreatedMarch 13, 2015
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