Please help me Thomas Plastics is in the process of developi

Please help me, Thomas Plastics is in the process of developing a revolutionary new plastic valve. A new division of the company was formed to develop, manufacture, and market this new product. As of year-end (December 31, 2018), the new product has not been manufactured for sale; however, prototype units were built and are in operation. Throughout 2018, the new division incurred a variety of costs. These costs included expenses (including salaries of administrative personnel) and market research costs. In addition, approximately $500,000 in equipment (estimated useful life of 10 years) was purchased for use in developing and manufacturing the new valve. Approximately $200,000 of this equipment was built specifically for developing the design of the new product; the remaining $300,000 of the equipment was used to manufacture the preproduction prototypes and will be used to manufacture the new product once it is in commercial production. The president of the company, Sally Rogers, has been told that research and development costs must be expensed as incurred, but she does not understand this treatment. She believes the research will lead to a profitable product and to increased future revenues. Also, she wonders how to account for the $500,000 of equipment purchased by the new division. “I thought I understood accounting,” she growled. “Explain to me why expenditures that benefit our future revenues are expensed rather than capitalized!”

Required: Write a one-to two-page report to Sally Rogers explaining the generally accepted accounting principles relevant to this issue. The report also should address the treatment of the equipment purchases.

Solution

Research

As per SFAS 2, research is arranged pursuit or basic examination went for disclosure of new information with the expectation that such learning will be helpful in building up another item or benefit or new process or procedure or in achieving a critical change to a current item or process.

Development

According to SFAS 2, development is the interpretation of research discoveries or other information into an arrangement or plan for another item or process or for a noteworthy change to a current item or process whether planned available to be purchased or utilize. Applied detailing, outline, and testing of item options, development of models, and operation of pilot plants are likewise incorporated into the meaning of development.

All the research and development costs should be charged to cost when brought about. Be that as it may, the conclusions came to by SFAS 2 for bookkeeping of research and development costs are because of the accompanying ideas: I. The research and development exercises are arranged into three kinds in particular, essential research, connected research, and development. ii. The essential introduction of this definition is centred on research identified with physical and natural sciences barring the research in sociologies. iii. High level of vulnerability in regards to the sum and timing of future advantages. iv. Absence of direct connection between R&D expenses and future incomes.

Bookkeeping treatment of gear costs:

I. The cost of $200,000 ought to be costs as Research and development costs.

ii. The rest of the $300,000 ought to be promoted and deteriorated.

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