Reference no: EM132555236

Hands4Life Ltd is a company which produces alcohol-free natural hand sanitizer. Their specially formulated hand sanitizer is clinically proven to kill 99.999% of bacteria, while at the same time contains moisturizing extracts of aloe, lavender and chamomile that is especially gentle on sensitive skin and does not sting.

In March 2019, the marketing team of Hands4Life Ltd conducted an intensive market survey among medical practitioners and the public in general to determine whether or not consumers would be interested in using an alcohol-free natural hand sanitizer. An amount of N$112 500 was spent on the market survey. The feedback from the market survey was overwhelmingly positive and suggested that consumers would welcome a product that is effective, yet safe and gentle enough for children to use.

The development and production of the hand sanitizer commenced in May 2019 and an amount of N$565 000 was spent by the production department during the months of May and June 2019 in the production of samples of the hand sanitizer. These samples were made available to a chiropractor in Keetmanshoop, a mother with small kids in Windhoek and a medical doctor in Ongwediva to test, who all agreed on the best sample. On 31 July 2019, after this testing phase, it was therefore concluded that sample number 2 was technically feasible to produce. Also, on this date all 6 of the capitalisation criteria, as prescribed by IAS 38, were met.

On 1 August 2019, the necessary manufacturing plant was acquired to produce a pilot of the hand sanitizer. The cost of this process was N$2 500 000. This plant could however only produce small quantities of the hand sanitizer and could not be used for full-scale market production. On 1 October 2019, a further N$950 000 was incurred to increase capacity and enable the production of significantly more products.

The patent for this product was available for use and registered on 1 November 2019 and full production of the hand sanitizer commenced on that date. The lifespan of the patent is 15 years.

Hands4Life Ltd's year end is 28 February.

Required:

Question a) Discuss the classification and treatment of each cost incurred, as per the below categories, during the reporting period ended 28 February 2020. Ignore VAT.

Market survey

Production of samples

Manufacturing process

Question b) Provide the journal entries for all of the above transactions for the year ended 28 February 2020. Ignore narrations.