Question

its first year ot operation till 31 December 2016, Dariah Bhd. has been h eavily investing in research and development (R&cD) activities. As a result of the ReD efonhi o convert riboflavin into Chemicals A the company has successfully devised processes t and B. The cost involved was RM96,000 For Chemical A, no commercial uses have yet been discovered. However, the company has successfully developed a health drink, Fuiyoo', based on Chemical B. The nesearch and development expenditures for the drink was RM240,000. Commercial production and sales of the health drink commenced on 1 June 2016. The product is expected to roduce steady revenues during a five-year period, before being replaced with a new product. Evidence indicates that the company has adequate existing resources to achieve this. Required: State developme 2016. clearly how you would treat the expenditures and determine the amount ot xenditure that should be capitalized by Dariah Bhd. at 31 Deser

Answer 1

In the given case the Dariah BHD Ltd has incurred heavy expenses on account of converting the riboflavin into chemical A & Chemical B

Total Expenditure incurred for this R & D is RM 96,000

But only Chemical B is developed with economic benefits towards the company therefore the Chemical A's R & D cost have no economic benefit towards the entity, therefore cost related to Chemical A should be directly debited to income statement.

50% of total amount is assumed to be used in R & D Expenditure of Chemical A, it Means 50% of 96,000 i.e RM 48,000 is required to charged off whereas remaining amount of RM 48,000 will be capitalized and to be charged to P& L in proportion of life of economic benefit from the use of Chemical B.

Total R & D Expenditure in development of Chemical B is RM 48,000 Plus RM 2,40,000 i.e 2,88,000. This amount would be capitalized & will be charged to P & L in next 5 Year of benefits

Total expenditure upto 31^st December 2016                                    =   2,88,000

Total No. of Month     = 60 Months

Life of project lapsed in current year ending 31^st December 2016 = 7 Months

Amount to be charged off in current year is RM 48,000 (being R & D expenditure of Unsuccessful research Chemical A) + 288000*7/60 = 81,600

Amount to be capitalized is remaining balance of R & D Expenditure as on 31^st December 2016 i.e 2,88,000 - 33,600 = RM 2,54,400