How you would determine the accounting treatment

Reference no: EM132213184

Question: Stark Ltd manufactures components for audio-visual systems and on 1 August 2017 commenced a project to design a more effective motion-sensing system. The following expenditures were outlaid during the course of research and development.

During September 2017, Stark Ltd paid $319,000 in salaries of company engineers and consultants to conduct tests on motion-sensing systems currently available in the market, with a view to making possible modifications and obtaining the knowledge.

During November 2017, A new motion-sensing system was designed and a basic model produced at a cost of $215,000. This model was determined to be unsatisfactory as the materials of which it was made were not suitable.

During January 2018, a further $101,000 was incurred in costs for the new motion-sensing system. Stark Ltd purchased a software for the motion-sensing system at a cost of $93,000.

During April 2018, Stark Ltd spent a further $230,000 to incorporate the new material into the design of the new motion-sensing system. By 30 April 2018, Stark Ltd was convinced it now had a viable product, because preliminary tests showed that the new motion-sensing system was far superior to any other available on the market.

During May 2018, Stark Ltd developed a prototype of the motion-sensing system and proceeded to test it with a variety of models of audio visual systems for which they provided components. By the end of May, the motion-sensing system proved to work successfully with the majority of the audio-visual systems available on the market and for which Stark Ltd supplied components. Further costs of $112,000 were incurred in this process. Additional costs of $38,000 were incurred for the workshops to train their manufacturing engineers with the newly developed motion-sensing system.

During June 2018, after receiving positive feedback from their manufacturing engineers of audio visual systems, Stark Ltd decided in June that they had a successful model and commenced planning production of the motion-sensing systems. Expenditures in June included $40,000 to display and demonstrate the new model to prospective purchasers.

Required: Explain how you would determine the accounting treatment for the items of expenditures mentioned above. Determine and state the items which would be expensed and those which would be capitalised. Provide your reasons in accordance with AASB 138.

Reference no: EM132213184

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