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Find development costs that should be treated as expense

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Reference no: EM132584209

There are currently four projects ongoing within the research and development department of Toys and Creativity Bhd.

Project A

In year 2019, RM42,000 was spent on research into a new plastic toy. It is hoped that when developed it will be successful and there will be a good market for the toy. It has not been established as to what type of toy will be.

Project B

Project B involves the development of a garden ornament. RM55,000 was spent on research during the year ended 31 December 2017 which was written off in year 2017. In year 2018 the company spent a further RM100,000 on identifying a product which as a 'plastic tower' ornament but the company was unsure as to the feasibility of the project. During the year to 31 December 2019 development costs incurred were RM220,000. This "tower" will be sold for people to put into their gardens. A market research was done which indicated that many people would want to buy this product. In 2020, the product is ready for sale this year and the life of the product is expected to be 5 years.

Project C

The company spent RM125,000 in year 2017 on research cost on a 'Dancer' a plastic model of a person that move artistically when it senses music. Development cost in 2018 were RM200,000. There were not capitalised at that time. Development cost in 2019 were RM350,000. The company intends to start selling the 'Dancer' during 2020 as its development phase is now completed. A business plan cash flow were prepared in January 2019 and showed that the net profit from this product for the first 5 years during production.

Project D

In 2017 Toys and Creativity Bhd appointed University College Sabah Foundation (UCSF) to undertake research into developing a new organic fertilizer. In 2017 the company paid UCSF RM45,000. In 2018, UCSF managed to develop a fertilizer which is very expensive to mass produce. So UCSF was paid RM240,000 in 2018 to find a process to mass produce the fertilizer cheaply. Market research showed that the farmers were inclined to buy this fertilizer. This market research cost amounted to RM200,000.

Required:

Question i. Classify the various phases of each project into research and development. Substantiate your answer.

Question ii. Determine the research and development costs that should be treated as expense and those should be deferred (capitalised) at the end each year (2017 - 2020) for each projects.

Reference no: EM132584209

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