Question

Prepare journal entries to record the transactions, inc on 31 December 2016 (if applicable) includig eloping a project to build industrial machinery that is abl are the achievements to ertsof the proje manufacture fish crackers efficiently. The following since Vitatrend Bhd. started the project in February 2 Achievements Dates Costs Made significant progress and was sufficiently sure of the future success of the project. However, there was no indication that the project would be commerciall February-June 2016 RM432,000 feasible Built a prototype that appeared to be successful The prototype was demonstrated to a number of engineering companies in September and several of these companies expressed interest in the further development of the machine. July-August 2016 RM145,000 September-October RM55,000 Made adjustments for the problems pointecd out by some of the engineering firms during the 2016 demonstration 31 October 2016 RM30,000 Applied for a patent on the machine and incurred legal and administrative costs. The patent has an expected useful life of five years, but is renewable for a further five years upon application. CHAPTER 3 Intangible Assets Dates Costs Achievements December 2016 RM185,000 Spent an additional amount on engineering and consulting costs to develop the project such that the machine was at manufacturing stage. This resulted in changes in the overall design of the machine. The cost of RM185,000 includes RM5,000 to add minor changes to the patent authority. invited tenders for the manufacture of the engine fo n/a January 2017 commercial sale. Required Discuss how Vitatrend Bhd. should account for these costs. Provide journal entries w an explanation of why they are the appropriate entries. CASE STUDY To Rarearch or Not to Research: An Entrepreneur's Dilemma in health products.

Answer 1

As per IAS 16 an item is to be recognized as PPE when it is probable that the company will generate some future economic benefit and the cost of the specified asset can be measured reliably.

The cost occurred between the period Feb-June'16 will be written off in the Profit and Loss A/c as the company is sure about the project but the same is not commercially feasible.

R&D Cost Dr/ 432000

To Cash 432000

Profit and Loss. A/c Dr 432000

To R&D Cost 432000

The Cost incurred between July to Oct'16 will be written off in the Profit and Loss A/c as here the product is shown to the companies and companies have shown interest but the same is not ready as due to some engineering problem which untimately fixed in the month of Oct. After fixing the same then the product become commercially viable as various companies have shown intent in the project,

R&D Cost Dr/ 200000

To Cash 200000

Profit and Loss. A/c Dr 200000

To R&D Cost 200000

The Patent cost will be represented as PPE cost because now the project is commercially viable after fixing the defect and filing the Patent

PPE Dr. 30000

To Cash 30000

The amount spend for changing the design and other related cost will be considered as PPE only as in the earlier step the same is considered for PPE and any further cost will be recognized as PPE unless it is established that it is not commercially feasible.

PPE Dr. 185000

To Cash 185000

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