CPA Financial Accounting and Reporting Far Quiz: Research And Development Costs

What this quiz covers

This quiz focuses on Research And Development Costs, giving you a quick way to practice the rules, question types, and explanations that matter most for CPA Financial Accounting and Reporting Far.

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Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

Question 1

1. $500,000
2. $100,000
3. $90,000 (correct answer)
4. $0

Explanation: When an asset purchased for R&D activities has an alternative future use, its cost should be capitalized. The depreciation on the asset is then allocated to R&D expense for the periods it is used in R&D. The annual straight-line depreciation is calculated as (Cost - Salvage Value) / Useful Life. In this case, it is ($500,000 - $50,000) / 5 years = $90,000 per year. This amount is the R&D expense for Year 1.

Question 2

1. Capitalize as a software development asset.
2. Report as research and development expense. (correct answer)
3. Record as a prepaid expense and amortize over five years.
4. Defer the costs until the product is launched and then expense.

Explanation: For software to be sold, leased, or otherwise marketed, all costs incurred to establish technological feasibility are considered research and development costs. Therefore, they must be expensed as incurred. Capitalization of software development costs begins only after technological feasibility has been established.

Question 3

1. $200,000
2. $230,000 (correct answer)
3. $370,000
4. $400,000

Explanation: Costs incurred after technological feasibility has been established but before the product is available for general release to customers should be capitalized. This includes coding and testing after feasibility ($200,000) and the production of product masters ($30,000). The total amount to be capitalized is $200,000 + $30,000 = $230,000. Costs incurred before technological feasibility ($50,000 + $120,000) must be expensed as R&D.

Question 4

1. Capitalize as an intangible asset and amortize over its useful life.
2. Capitalize as an indefinite-lived intangible asset and test for impairment.
3. Expense the entire $400,000 as research and development cost immediately. (correct answer)
4. Record the payment as part of goodwill from the acquisition.

Explanation: When R&D is acquired in a transaction other than a business combination (i.e., an asset acquisition), the treatment depends on whether the assets have an alternative future use. If, as in this case, there is no alternative future use, the entire cost must be expensed immediately as research and development expense.

Question 5

1. $535,000
2. $500,000
3. $35,000 (correct answer)
4. $0

Explanation: Under U.S. GAAP, all internal R&D costs ($500,000) incurred to develop a product or process must be expensed as incurred. However, the legal fees and other direct costs associated with securing a patent ($35,000) are capitalized as an intangible asset (the patent) and amortized over its legal or useful life, whichever is shorter.

Question 6

1. Conceptual formulation and design of possible product alternatives.
2. Design, construction, and testing of pre-production prototypes and models.
3. Laboratory research aimed at discovery of new knowledge.
4. Routine, on-going efforts to refine, enrich, or otherwise improve upon the qualities of an existing product. (correct answer)

Explanation: ASC 730 explicitly excludes routine or periodic alterations to existing products, production lines, manufacturing processes, and other on-going operations from the definition of R&D. The other three options (conceptual formulation, prototype design/testing, and laboratory research) are core examples of activities that are included in R&D.

Question 7

1. $100,000
2. $120,000 (correct answer)
3. $200,000
4. $240,000

Explanation: Amortization of capitalized software costs is the greater of the amount computed by (1) the straight-line method or (2) the ratio of current gross revenues to total anticipated gross revenues.

1. Straight-line: $600,000 / 5 years = $120,000.
2. Revenue ratio: ($200,000 current revenue / $1,000,000 total anticipated revenue) * $600,000 = 0.20 * $600,000 = $120,000. Since both methods result in $120,000, the amortization expense is $120,000.

Question 8

1. $300,000 (correct answer)
2. Debit Impairment Loss for $350,000; Credit Capitalized Software Costs for $350,000.
3. Debit Retained Earnings for $300,000; Credit Capitalized Software Costs for $300,000.
4. No entry is required until the software is sold or disposed of.

Explanation: Capitalized software costs are tested for impairment by comparing the carrying amount to the net realizable value (NRV). NRV is the estimated future net cash flows from the product. Since the carrying amount ($800,000) exceeds the NRV ($500,000), an impairment loss of $300,000 ($800,000 - $500,000) must be recognized. The entry is: Debit Impairment Loss $300,000; Credit Capitalized Software Costs $300,000.

Question 9

1. Capitalize them as part of the cost of the new manufacturing process.
2. Expense them as research and development.
3. Expense them as a manufacturing or period cost. (correct answer)
4. Defer and amortize them over the life of the product.

Explanation: Costs incurred during the start-up of commercial production are explicitly excluded from the definition of research and development. These costs, such as troubleshooting production issues, are considered normal operating expenses (either manufacturing overhead or a period cost) and should be expensed as incurred.

Question 10

1. $300,000
2. $400,000 (correct answer)
3. $550,000
4. $625,000

Explanation: R&D expense is calculated by summing the costs that qualify under GAAP. This includes: all costs for Project Alpha (basic research) of $300,000, plus the costs for Project Beta incurred before technological feasibility ($100,000). The costs for Project Gamma (routine follow-through) are excluded from R&D. The costs for Project Beta after feasibility ($150,000) are capitalized. Total R&D expense = $300,000 + $100,000 = $400,000.

Question 11

1. Research and development expense.
2. Selling, general, and administrative expense.
3. Cost of services provided. (correct answer)
4. A direct reduction of revenue.

Explanation: The costs of R&D activities performed for others under a contract are not considered R&D expenses for the entity performing the work. Instead, these costs are accounted for as the cost of services provided (similar to cost of goods sold) and are matched with the revenue from the contract.

Question 12

1. At the beginning of the preliminary project stage.
2. After the preliminary project stage is complete and management has committed to funding the project. (correct answer)
3. When technological feasibility has been established, similar to software for external sale.
4. Only upon the completion and successful implementation of the entire system.

Explanation: For internal-use software, capitalization begins after the preliminary project stage is complete and when management, with the relevant authority, implicitly or explicitly authorizes and commits to funding the project, and it is probable that the project will be completed and the software will be used to perform its intended function. Costs in the preliminary stage are expensed. The 'technological feasibility' milestone applies to software developed for external sale, not internal use.

Question 13

1. As research and development expense of $750,000. (correct answer)
2. As a reduction of the grant liability, resulting in no expense.
3. Netted against grant income, resulting in zero impact on operating income.
4. Capitalized as a deferred asset to be matched against future revenues.

Explanation: Under U.S. GAAP, R&D costs are expensed as incurred, regardless of the source of funding. The grant from the government does not change the nature of the expenditure. ChemCo must report $750,000 as R&D expense. The accounting for the grant itself would typically involve recognizing a liability and then recognizing income (e.g., other income) as the related expenses are incurred, but the R&D expense classification is unaffected.

Question 14

1. The entire $200,000 should be charged to general and administrative expense.
2. $50,000 should be allocated to research and development expense. (correct answer)
3. The entire $200,000 should be charged to research and development expense.
4. No portion of the depreciation should be allocated to research and development expense.

Explanation: Indirect costs, such as depreciation on a shared facility, should be allocated on a reasonable basis to the functions that benefit from them. A reasonable allocation of the building's depreciation should be made to R&D expense. Allocating based on space occupied is a reasonable method. Therefore, 25% of $200,000, which is $50,000, should be included in R&D expense.

Question 15

1. Capitalize the costs as an improvement to the existing product.
2. Expense the costs as selling, general, and administrative expense.
3. Expense the costs as research and development. (correct answer)
4. Add the costs to the inventory cost of the newly designed product.

Explanation: While routine or periodic alterations to existing products are excluded from R&D, significant improvements or radical redesigns that involve new technology fall under the definition of research and development activities. Therefore, these costs should be expensed as R&D as incurred.

Question 16

1. Expense the $2,000,000 immediately as research and development expense.
2. Include the $2,000,000 as part of goodwill.
3. Capitalize the $2,000,000 as an indefinite-lived intangible asset. (correct answer)
4. Defer the cost and amortize it over the estimated life of the project.

Explanation: In a business combination, acquired in-process research and development (IPR&D) is recognized as an asset separate from goodwill at its acquisition-date fair value. Since the project has not yet reached technological feasibility, it is considered an indefinite-lived intangible asset and is not amortized but is tested for impairment annually until the project is completed or abandoned.

Question 17

1. Capitalize the full cost and depreciate it over the life of the R&D project.
2. Expense the full $220,000 cost as research and development expense. (correct answer)
3. Capitalize the cost as an intangible asset and test for impairment annually.
4. Expense the depreciation for the first year as research and development expense.

Explanation: According to U.S. GAAP, the cost of materials, equipment, or facilities that are acquired for a particular R&D project and have no alternative future use should be expensed as R&D in the period the costs are incurred. Since the equipment has no alternative use, its entire cost of $220,000 is included in R&D expense for the year.

Question 18

1. $380,000 (correct answer)
2. $410,000
3. $425,000
4. $455,000

Explanation: Research and development (R&D) expense includes costs directly attributable to R&D activities. The calculation is as follows: Salaries of R&D personnel (250,000) + Materials consumed in R&D (90,000) + Depreciation on equipment used exclusively for R&D ($40,000) = $380,000. Marketing research, quality control during commercial production, and legal fees for a patent application are explicitly excluded from R&D expense. Patent legal fees are capitalized as an intangible asset.

Question 19

1. $380,000 (correct answer)
2. $410,000
3. $425,000
4. $455,000

Explanation: Research and development (R&D) expense includes costs directly attributable to R&D activities. The calculation is as follows: Salaries of R&D personnel (250,000) + Materials consumed in R&D (90,000) + Depreciation on equipment used exclusively for R&D ($40,000) = $380,000. Marketing research, quality control during commercial production, and legal fees for a patent application are explicitly excluded from R&D expense. Patent legal fees are capitalized as an intangible asset.

Question 20

1. $500,000
2. $100,000
3. $90,000 (correct answer)
4. $0

Explanation: When an asset purchased for R&D activities has an alternative future use, its cost should be capitalized. The depreciation on the asset is then allocated to R&D expense for the periods it is used in R&D. The annual straight-line depreciation is calculated as (Cost - Salvage Value) / Useful Life. In this case, it is ($500,000 - $50,000) / 5 years = $90,000 per year. This amount is the R&D expense for Year 1.