[Kay12345]

I am using the Becker study materials for FAR.

On of one of the practice questions. The question asked the following:

During the current year, Orr Co. incurred the following costs:
Research and development services performed by Key Corp. for Orr $ 150,000
Design, construction, and testing of preproduction prototypes and models $200,000
Testing in search for new products or process alternatives $175,000

In its current year income statement, what should Orr report as research and development expense under U.S. GAAP?
a.
$200,000
b.
$525,000
c.
$150,000
d.
$350,000

The answer is b. But,I do not understand why the answer is b. Shouldnt “Research and development services performed by Key Corp. for Orr” be capitalized under Gaap?

Thanks.

[waffle_house]

Key Corp would capitalize the R&D cost since they are performing it for another company. Orr Co would just expense the R&D.

I think you have it backwards.

[Stilgoin]

For something to be capitalized, it has to undoubtedly provide future economic benefit to a company. Otherwise, it is expensed. Capitalization makes a company have more assets and is better than just expensing an item. There is no evidence that this R&D performed by Key will provide future benefit to Orr.

Halfway down this page is a list of exceptions. Outsourced R&D is expensed.

https://www.accountingtools.com/questions-and-answers/research-and-development-accounting.html

B | 62, 78
A | 73, 67, 79
R | 82
F | 59, 59, Waiting

Ethics | 93

"Success is not final, failure is not fatal: it is the courage to continue that counts."
~Winston Churchill

“In a world full of critics, be an encourager."

[waffle_house]

@stilgoin

You are correct, had to go back to my Becker book to make sure lol. Disregard my previous post. Both companies would expense the R&D.

[Author]

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