Listed below' are several transactions that occurred during the year. All these amounts in each case were capitalized to an account called “R&D costs.” At the end of the year the company wants this account closed out and these amounts either expensed or capitalized to an asset account called “Development costs.”
a. During the year $45,000,000 was paid to all staff in the research division of a pharmaceutical firm. Supplies used totalled $5,000,000. Rent on the research building totalled $2,000,000. Utilities totalled $1,000,000. Head office allocated $4,000,000 in general overhead to the research division. The total spent on research was therefore $57,000,000. The company is completing five different projects investigating whether five different drug combinations effectively reduce cancer in patients. One of the five drugs was very successful in most cases. Market research shows there is a huge market for this drug. The Board has committed resources to complete the project and market the drug; 15% of the total research staff are working on the successful drug combination.
b. During the year $45,000,000 was paid to staff to investigate whether a drug combination was effective for reducing a specific type of cancer. The drug was very successful in most cases. Management is committed to continuing this project and has secured financial and technical resources to see if the drug will prove to be commercially viable.
c. Last year $55,000,000 in costs were capitalized as all the development cost criteria were satisfied for a specific drug combination. During the current year a further $15,000,000 was spent that can be directly attributed to this drug’s development. Near the end of the year a competitor surprisingly started selling a similar drug. The first-mover advantage of the competing drug seriously challenges the market usefulness and success of the drug this company is researching. Management and the Board are nonetheless financially and strategically committed to launching their drug in 18 months.
Required:
Prepare the journal entry for each case. Where necessary’ or useful, explain your proposed treatment.