A company incurred $100,000 in research costs and $50,000 in development costs for a new product during the current year. The development costs met the criteria for capitalization under U.S. GAAP starting from the point a project's technological feasibility was established, which was $20,000 of the total development costs. How should these costs be recognized in the financial statements for the current year?
- ACapitalize $150,000 as an intangible asset.
- BExpense $130,000 and capitalize $20,000.
- CExpense $100,000 and capitalize $20,000.
- DExpense $100,000 and capitalize $50,000.
Show answer & explanationAnswer & explanation
Correct answer: B. Expense $130,000 and capitalize $20,000.
Under U.S. GAAP, research costs are always expensed as incurred. Development costs are expensed until technological feasibility is established, after which they are capitalized. Therefore, the $100,000 research costs are expensed. Of the $50,000 development costs, only the $20,000 incurred after technological feasibility was established are capitalized. The remaining $30,000 ($50,000 - $20,000) of development costs are expensed. Total expense = $100,000 (research) + $30,000 (development) = $130,000. Total capitalized = $20,000.
Why the other options are wrong
- A. Research costs are never capitalized under U.S. GAAP, and only a portion of development costs may be.
- C. This incorrectly expenses all development costs except the $20,000, but the calculation of total expense is incorrect if $50,000 was the total development cost.
- D. This incorrectly assumes all development costs are capitalized, ignoring the technological feasibility criterion.
Research and Development (R&D) Costs
Under U.S. GAAP, research costs are expensed as incurred, while development costs are expensed until technological feasibility is established, after which they are capitalized and amortized.
- Research costs aim to discover new knowledge.
- Development costs apply research findings to a plan or design.
- Technological feasibility is the key capitalization trigger for development costs (for internal-use software, it's 'probable' that project will be completed and used).
Memory trick: Research out, development waits for tech point.