During the year ended 15 May 2023, Flummoxed Limited invested heavily in the research and development of a new digital learning device. $30,000 was incurred to determine what features would be popular among its potential users to determine the features that should be included in the device. Another $40,000 was spent to determine what materials would be most suitable for the device. The information gathered was then used to develop a preproduction prototype. The development of the preproduction prototype cost the company $67,000. Another $35,000 was incurred to test the prototype. All amounts were paid in cash.

 

There is already great interest in the prototype, and it is clear that there will be a market for this product. The directors are confused why some of the amounts incurred have been expensed while others capitalized. They feel that all amounts incurred during the year should be capitalized as it is clear that the company will be able to sell the devise at a tremendous profit once production starts.

 

- Explain in your Statement of Advice how to determine which amounts incurred for research and development should be expensed and which can be capitalized? 

- Are there any specific requirements that should be considered? 

- What is the rationale for the difference in treatment of these costs? 

- Please explain the requirements with examples that would be relevant to Flummoxed Limited and include relevant journal entries. 

(Your recommendations must be justified by reference to specific paragraphs of relevant accounting standards. Where necessary you will need to explain the rationale behind certain accounting standard requirements.)

Answer rating: 100% (QA)

Statement of Advice To determine which amounts incurred for research and development RD should be expensed and which can be capitalized Flummoxed Limited should follow the guidelines outlined in the r... View the full answer