CPA Exam - FAR (Financial Accounting and Reporting)Select TransactionsMedium
A company incurred $500,000 in research costs and $200,000 in development costs for a new product. The development costs met the criteria for capitalization under GAAP. Additionally, the company spent $100,000 on general and administrative expenses related to the project. What amount should the company report as research and development expense in the current period?
- A$800,000
- B$600,000
- C$700,000
- D$500,000
Show answer & explanationAnswer & explanation
Correct answer: B. $600,000
All research costs are expensed as incurred. Development costs are expensed unless they meet specific capitalization criteria. Here, the $200,000 development costs met capitalization criteria, so they are not expensed. General and administrative expenses related to R&D are also expensed. Therefore, total R&D expense is $500,000 (research) + $100,000 (G&A) = $600,000.
Why the other options are wrong
- A. This incorrectly includes capitalized development costs and general & administrative.
- C. This incorrectly includes the capitalized development costs.
- D. This only includes research costs and omits general and administrative expenses.
Research and Development (R&D) Costs
GAAP generally requires research and development costs to be expensed as incurred, with limited exceptions for certain development costs.
- Research costs are always expensed.
- Development costs may be capitalized if specific criteria are met (e.g., technological feasibility achieved, intent to use/sell).
- General and administrative costs related to R&D are expensed.
Memory trick: INTANGIBLES are often 'EXPENSED' unless they meet specific 'CAPITALIZATION' rules.