Question

During 2018, Carla Vista Company purchased a building site for its proposed research and development laboratory at a cost of $55,000. Construction of the building was started in 2018. The building was completed on December 31, 2019, at a cost of $360,000 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		18		$82,000		$44,000
Abandoned projects or projects that
benefit the current period		10		70,000		18,000
Projects in process—results indeterminate		8		39,000		15,000
Total		36		$191,000		$77,000

Upon recommendation of the research and development group, Carla Vista Company acquired a patent for manufacturing rights at a cost of $112,000. 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.

Carla Vista Company Income Statement (Partial)
select an income statement item                                                                      Research and Development ExpensesAmortization of PatentLandBuilding-NetPatent-Net		$enter a dollar amount
select an income statement item                                                                      Research and Development ExpensesAmortization of PatentLandBuilding-NetPatent-Net		enter a dollar amount

The company’s balance sheet as of December 31, 2020.

Carla Vista Company Balance Sheet (Partial) choose the accounting period                                                                      For the Year Ended December 31, 2020For the Month Ended December 31, 2020December 31, 2020
select a balance sheet item                                                                      Research and Development ExpensesAmortization ExpenseLandBuilding-NetPatent-Net					$enter a dollar amount
select a balance sheet item                                                                      Research and Development ExpensesAmortization ExpenseLandBuilding-NetPatent-Net					enter a dollar amount
select a balance sheet item                                                                      Research and Development ExpensesAmortization ExpenseLandBuilding-NetPatent-Net					enter a dollar amount

Answer 1

ANSWER

Solution-a

Carla Vista Company Income statement (Items and amounts) for the year ended December 31, 2020
R & D expenses*	$286,000
Amortization of patent ($112,000/10 years)	$11,200

Calculation of R & D expenses

Depreciation on building ($360,000 /20 years)	$18,000
Salaries and employee benefits	$191,000
Other expenses	$77,000
Total	$286,000

Solution-b

Carla Vista Company Balance Sheet (Items and amounts) for the year ended December 31, 2020
Land	$55,000
Building ($360,000 -$18,000)	$342,000
Patent ($112,000-$19,600)	$92,400

Calculation of R & D patents

([$112,000/10]*3/4) + ($112,000/10) = $19,600

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