Kilgore Pharmaceuticals paid cash for the following amounts to fund its research activities: testing materials and supplies, $611,600; research consultants, $111,200; planning and design consultants, $135,300; and general-purpose laboratory equipment, $957,000. The equipment has a 10-year useful life and no residual value. Prepare the journal entry required to record Kilgores research expenditures for the year. The equipment was acquired on
Research and development (R&D) is one of the most important investments for industries such as pharmaceuticals and information technology. A company undertakes R&D activities to create new products or processes to generate future revenues. R&D activity includes laboratory research designed to discover new knowledge, testing to determine process alternatives, modification of product or process design, and conceptual formulation and design of product or process alternatives. There is a distinction between research-phase and development-phase costs:
Research-phase activities include an original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding.
Development-phase expenditures relate to the application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems, or services before the start of commercial production or use.
R&D activity excludes quality control, troubleshooting, and routine and ongoing initiatives designed to refine existing products or processes and the adaptation of existing capabilities.
Firms must expense almost all R&D costs as incurred. In limited cases, firms can capitalize some R&D costs. R&D costs that are reimbursed under contract (i.e., sold to another firm or through customer-funded R&D) would be capitalized as a receivable or accumulated in an inventory account if reimbursed. Firms can also capitalize R&D equipment and buildings with alternative future uses. In addition, firms can capitalize the cost of R&D in a patent account if the research was purchased from an outside research firm. Finally, certain internally generated software development costs can be capitalized after the company establishes technological feasibility and the software is sold, leased, or marketed to third parties (external users).
To record the R&D expense for the year, we include all the research activities expenses except for the equipment cost. Recall that firms can capitalize R&D equipment and buildings with alternative future uses. We know that the equipment purchased is general-purpose laboratory equipment. The company can use the general-purpose laboratory equipment in the laboratory for an extended period of time for several alternative experiments. As a result, Kilgore should capitalize and depreciate the equipment over its useful life .