Question

During 2016, Monty Corporation spent $156,960 in research and development costs. As a result, a new product called the New Age Piano was patented. The patent was obtained on October 1, 2016, and had a legal life of 20 years and a useful life of 10 years. Legal costs of $32,400 related to the patent were incurred as of October 1, 2016.

Answer 1

Answer:

The entries during 2016 are as follows:

- Intangible asset (R&D)  $156960

                                      Cash  $156960

- Patent   $32400

             Cash  $32400

- Patent amortization expense  $3240

                                                Patent $3240

Explanation:

According to IAS 38 (Intangible assets), research and development costs should only be capitalized (recorded as intangible assets) when all of the following criteria is met.

1- The entity intends to complete the development of research findings.

2- The costs of research and development can be reliably measured.

3- There are adequate resources available for the development and development has technical feasibility.

4- It's probable that future economic benefits will flow to the entity.

Given the data in the question, all of the requirements are met under IAS 38 and hence the research and development costs are capitalized (recorded as an intangible asset). Secondly, the patent is also an intangible non-current asset.

The entries during 2016 are as follows:

- Intangible asset (R&D)  $156960

                                      Cash  $156960

- Patent   $32400

             Cash  $32400

- Patent amortization expense  $3240

                                                Patent $3240

Patent amortization is calculated by dividing the cost of patent upon it's useful life (i.e $32400÷10).