The Gratwick Company is in the process of developing a revolutionary new product. A new division of the company was formed to develop, manufacture, and market this new product. As of year-end (December 31, 2006), the new product has not been manufactured for resale; however, a prototype unit was built and is in operation.
Throughout 2007 the new division incurred certain costs. These costs include design and engineering studies, prototype manufacturing costs, administrative expenses (including salaries of administrative personnel), and market research costs. In addition, the company purchased approximately $500,000 in equipment (estimated useful life, 10 years) for use in developing and manufacturing the new product. The company built approximately $200,000 of this equipment specifically for the design and development of the new product; it used the remaining $300,000 of equipment to manufacture the preproduction prototype and will use it to manufacture the new product once it is in commercial production.

Required
1. What is the definition of research and of development as defined in FASB Statement No. 2?
2. Briefly indicate the practical and conceptual reasons for the conclusion reached by the FASB on accounting practices for research and development costs.
3. In accordance with FASB Statement No. 2, how should Gratwick record the various costs in the financial statements for the year ended December 31, 2007?