Reference no: EM132506160

Point 1: Rosalie Ltd has been involved in a project to develop an engine that runs on fuel extracted from sugar cane. It started the project in February 2023. Between then and 30 June 2023, the end of the company's reporting period, Rosalie Ltd spent $508 000 on the project. At 30 June 2023, there was no indication that the project would be commercially feasible, although the company had made significant progress and was sufficiently confident of future success that it was prepared to outlay more funds on the project.

Point 2: After spending a further $240 000 during July and August, the company had built a prototype that appeared to be successful. The prototype was demonstrated to a number of engineering companies during September, and several of these companies expressed interest in the further development of the engine. Convinced that it now had a product that it would be able to sell, Rosalie Ltd spent a further $130 000 during October adjusting for the problems that the engineering firms had pointed out. On 1 November, Rosalie Ltd applied for a patent on the engine, incurring legal and administrative costs of $70 000. The patent had an expected useful life of 7 years, but was renewable for a further 7 years upon application.

Point 3: Between November and December 2023, Rosalie Ltd spent an additional amount of $164 000 on engineering and consulting costs to develop the project such that the engine was at manufacturing stage. This resulted in changes in the overall design of the engine, and costs of $10 000 were incurred to add minor changes to the patent authority.

Point 4: On 1 January 2024, Rosalie Ltd invited tenders for the manufacture of the engine for commercial sale.

Required

Question 1: Discuss how Rosalie Ltd should account for these costs. Provide journal entries with an explanation of why these are the appropriate entries.