Final Assignment

Case Assignment
Course: Intermediate Accounting I
Course Code: ACT-411
Section: 01
Semester: Spring-2020

Prepared For:
Instructor: Dr. Anup Chowdhury
Dean
Faculty of Business & Economics
Professor
Department of Business Administration
East West University

Prepared By:
Name: Sandip Ghosh
ID No: 2017-2-10-215
Department of Business Administration
East West University

Date of Submission: 07th May, 2020.

 Answer to the question no: 1

We have to prepare a report for Ms. Bali to present to the directors to help them understand the nature
of goodwill and how to account for it:

Nature of goodwill:

Goodwill is an intangible asset and only recognized when it is acquired as a result of a business
combination. Goodwill represents the premium paid by the acquirer over and above the fair value of the
net assets presumably in the belief that the business will generate additional benefits from such
synergy. It may arise because the acquirer has identified undervalued or unrecorded assets that the
acquirer did not recognize. Importantly only acquired goodwill may be recognized.

How to account for it:

 Internal goodwill: AASB 138 states that this cannot be recognized as cannot determine a cost

 Acquired goodwill

 Recognized only in a business combination

 Measured as a residual under para 32

 Subject to annual impairment test

 If allocated to CGU, write off first if impairment loss

 If reversal of impairment loss, no reinstatement of goodwill

 Future effects on Statement of Comprehensive Income

 No cause for concern

 No annual amortization

 Only expense if impairment loss

 Impairment loss cushioned by various accounting treatments such as use of cost

method for PPE, non-recognition of internally generated goodwill & internally generated
intangibles
 Answer to the question no: 2
Discussing the items included in the patent account from an according stand point:
a) A company capitalized the cost associated with successfully defending the patent as the
benefits of the patent are maintained for its remaining economic life.
b) If the company loses the lawsuit, it immediately expenses all legal cost and write-off the
remaining book value of the patent because there is no remaining economic life.
c) Cost of improvement on patent is added in unamortized value of old patent and the cost
of new patent is capitalized.
d) The cost of internally develop patent is treated in a two different way.
e) The legal cost associates with the obtaining legal rights and in defense of those right is
capitalized over its useful life.
f) R&D cost of obtaining the patent is immediately expense is incurred.
 Answer to the question no: 3

1 Clonal should report the equipment purchased for Trouver in its income statements and balance
sheets is given below:
 The equipment purchased for trouver should be reported as follows in clonal’s income
statements and statement of financial position.
 Depreciation on equipment should be charged to income statement as Research and
Development expense because the equipment will be used for other research projects also.
 The equipment should be reported as net of depreciation in statement of financial position at
the end of the year.

2(a) Matching principle:

The matching principle instructs that an expense should be reported in the same period in which the
corresponding revenue is earned, and is associated with accrual accounting.

(b) The accounting treatment of research and development costs and consider whether this is
consistent with the matching principle is given below:

Under International Accounting Standards (IAS) the accounting for R&D is dealt with IAS 38, intangible
assets. IAS 38 states that all expenditure incurred at the research stage should be written off to the
income statement when incurred and will never be capitalized as an intangible asset. At development
stage IAS 38 gives some criteria and if any of the recognition criteria are not met then the expenditure
must be charged into the income statement as incurred. Note that if the recognition criteria have been
met, capitalization must take place.

This treatment of research and development costs indicates that this is not consistent with the matching
principle. Because under matching principle revenues are recognized with their related expenses to
avoid misstating earnings. But revenue from R&D costs is uncertain as they are intangible asset.
Therefore it is not easy to recognize revenue with their related costs.

3. The justification for the accounting treatment of research and development costs:

IAS 38 conditions for capitalizing R&D costs are subjective, for instance how does a company assess the
probability of whether or not development expenditure will generate future economic benefits? And
since the expected future flow of revenue is uncertain, it would be difficult to match revenue an R&D
costs. In consequence, this favors the argument of expensing all R&D costs in the accounting period they
are incurred. However, potential investors and other users of financial statement evaluating the
company would note that the assets appearing on the balance sheet are incomplete because the huge
amount spent to create future benefits are not recognized and reported in the statement of financial
position of the company
 Answer to the question no: 4
A. Research, as defined in GAAP is planned search or critical investigation aimed at discovery of
new knowledge with the hope that such knowledge will be useful in developing a new product
or service ... or a new process or technique ... or in bringing about a significant improvement to
an existing product or process. Development, as defined in GAAP is the translation of research
findings or other knowledge into a plan or design for a new product or process or for a
significant improvement to an existing product or process whether intended for sale or use.
B. The current accounting and reporting practices for research and development costs were
promulgated by the Financial Accounting Standards Board in order to reduce the number of
alternatives that previously existed and to provide useful financial information about research
and development costs. The FASB considered four alternative methods of accounting: (1) charge
all costs to expense when incurred, (2) capitalize all costs when incurred, (3) selective
capitalization, and (4) accumulate all costs in a special category until the existence of future
benefits can be determined.The authoritative guidance for R&D does not apply to activities that
are unique to enterprises in the extractive industries. Accounting for the costs of research and
development activities conducted for others under a contractual arrangement is a part of
accounting for contracts in general and is addressed in other literature See in reaching this
decision, the FASB considered the three pervasive principles of expense recognition: (1)
associating cause and effect (2) systematic and rational allocation, and (3) immediate
recognition. The FASB found little or no evidence of a direct causal relationship between current
research and development expenditures and subsequent future benefits. The FASB also stated
that the high degree of uncertainty surrounding future benefits
C. The following costs attributable only to research and development should be expensed as
incurred:
 Design and engineering studies
 Prototype manufacturing costs.
Administrative costs related solely to research and development. The cost of equipment produced
solely for development of the product ($315,000).

The remaining $585,000 of equipment should be capitalized and shown on the statement of financial
position at cost, less accumulated depreciation. The depreciation expense resulting from the current
year is a part of research and development expense for the year. The market research direct costs and
related administrative expenses are not research and development costs. These costs are treated as
period costs and are shown as expense items in the current income statement.