Question

During 2018, Cullumber Company purchased a building site for its proposed research and development laboratory at a cost of $67,000. Construction of the building was started in 2018. The building was completed on December 31, 2019, at a cost of $480,000 and was placed in service on January 2, 2020. The estimated useful life of the building for depreciation purposes was 20 years. The straight-line method of depreciation was to be employed, and there was no estimated residual value.

Management estimates that about 50% of the projects of the research and development group will result in long-term benefits (i.e., at least 10 years) to the corporation. The remaining projects either benefit the current period or are abandoned before completion. A summary of the number of projects and the direct costs incurred in conjunction with the research and development activities for 2020 appears below.

		Number of Projects		Salaries and Employee Benefits		Other Expenses (excluding Building Depreciation Charges)
Completed projects with long-term benefits		19		$86,000		$50,000
Abandoned projects or projects that
benefit the current period		10		51,000		13,000
Projects in process—results indeterminate		9		35,000		10,000
Total		38		$172,000		$73,000

Upon recommendation of the research and development group, Cullumber Company acquired a patent for manufacturing rights at a cost of $92,000. The patent was acquired on April 1, 2019, and has an economic life of 10 years.

If generally accepted accounting principles were followed, how would the items above relating to research and development activities be reported on the following financial statements?

The company's income statement for 2020. Cullumber Company Income Statement (Partial) e Textbook and Media The company's balance sheet as of December 31, 2020. Cullumber Company Balance Sheet (Partial)

Answer 1

Answer :-

The company's income statement for 2020 are as follows :-

Cullumber Company Income statement (Items and amounts)
Research and Development expenses (Note - 1)	$269,000
Amortization expense of patent (Note - 2)	$9,200

Note 1 :-

The research and development expenses are as follows :-

Particular	Amount
Depreciation on building (=cost of building /Useful life of building=$480,000 / 20)	$24,000
Total Salaries and employee benefits	$172,000
Total other expenses	$73,000
Research and Development expenses	$269,000

Note 2:-

Cost of Patent = $92,000

Economic life of Patent = 10 years

Amortization expense of patent = cost of patent × Economic life of patent

Amortization expense of patents = $92,000/10years =$9,200

The company's balance sheet as of December 31, 2020 are as follows :-

Cullumber Company Balance Sheet For the year ended December 31, 2020
Land	$67,000
Building	$456,000
Patent	$75,900

Note 3:-

Here the land amount is equal to building site cost of $67,000 Purchase for its proposed research and development laboratory.

Building = Cost of building - Depreciation Expense of Building

Building = $480,000 - $24,000

Building = $456,000

Patent = Cost of Patent - Depreciation Expense of Patent

We have to calculate the Depreciation Expense of Patent for 1 year and 9 months as Patent are purchased on April 1, 2019

Depreciation Expense of patent for 1 year = $92,000/10 years Economic life = $9,200

And depreciation expense of patent for 9 months = ($92,000/10) × 9/12 = $6,900

Total depreciation expense of patent = $9,200 + $6,900 = $16,100

Patent =$92,000 - $16,100 = $75,900