Question

Problem 11-28 (LO 11-9)

Trecek Corporation incurs research and development costs of $612,000 in 2017, 30 percent of which relate to development activities subsequent to IAS 38 criteria having been met that indicate an intangible asset has been created. The newly developed product is brought to market in January 2018 and is expected to generate sales revenue for 10 years.

Assume that a U.S.–based company is issuing securities to foreign investors who require financial statements prepared in accordance with IFRS. Thus, adjustments to convert from U.S. GAAP to IFRS must be made. Ignore income taxes.

Required:

1. Prepare journal entries for research and development costs for the years ending December 31, 2017, and December 31, 2018, under (1) U.S. GAAP and (2) IFRS.
2. Prepare the entry(ies) that Trecek would make on the December 31, 2017, and December 31, 2018, conversion worksheets to convert U.S. GAAP balances to IFRS.

Answer 1

a) 30% of R&D costs of $612,000/- = $183,600/-

70% of R&D costs of $612,000/- = $428,400/-

(1) Journal entry for R&D cost for the year ended December 31, 2017 as per US GAAP : As per US GAAP, R&D costs incurred are expensed when they are incurred.

Dec 31,2017	R&D Expenses	$612,000
	Cash		$612,000

Journal entry for R&D cost for the year ended December 31, 2017 as per IFRS : As per IFRS, R&D costs are separated as research cost and development cost. In this case 30% of the total R&D cost incurred, relates to development cost. The Research cost of 70% i.e $428,400/- is expensed when incurred. But the 30% development cost is amortized over a period when its expected to generate sale revenue i.e over 10 years. As the product is brought to market in January 2018, for Dec 31, 2018, the amortized value using straight line method will be shown i.e 183,600/10 = $18,360/-

Dec 31,2017	R&D expenses	$428,400
	Cash		$428,400
Dec 31,2017	Intangible Asset	$183,600
	Amortization expenses		$183,600
Dec 31,2018	Amortization expenses	$18,360
	Intangible Asset		$18,360

(2) The adjustment entries that Trecek will have to prepare at end of Dec 31,2017 for conversion from US GAAP to IFRS is entry 1 below and for Dec 31,2018 is :

Dec 31,2017	Cash	$183,600
	R&D Expenses		$183,600
Dec 31,2017	Intangible Asset	$183,600
	Amortization expenses		$183,600
Dec 31,2018	Amortization expenses	$18,360
	Intangible Asset		$18,360