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CPA Financial Accounting and Reporting Far Quiz

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

Practice Research And Development Costs in CPA Financial Accounting and Reporting Far with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

Question 1 / 20

0 of 20 answered

On January 1, Year 1, Apex Industries purchased a specialized machine for 500,000tobeusedinitsresearchanddevelopmentdepartment.Themachinehasanestimatedusefullifeof5yearsandasalvagevalueof500,000 to be used in its research and development department. The machine has an estimated useful life of 5 years and a salvage value of 500,000tobeusedinitsresearchanddevelopmentdepartment.Themachinehasanestimatedusefullifeof5yearsandasalvagevalueof50,000. The machine can be used in the company's regular production activities after the current R&D project is completed in two years. Apex uses the straight-line method of depreciation.

What amount of expense related to this machine should Apex include in its research and development expense for Year 1?

Select an answer to continue

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.

How to use this quiz

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.

All questions

Question 1

On January 1, Year 1, Apex Industries purchased a specialized machine for 500,000tobeusedinitsresearchanddevelopmentdepartment.Themachinehasanestimatedusefullifeof5yearsandasalvagevalueof500,000 to be used in its research and development department. The machine has an estimated useful life of 5 years and a salvage value of 500,000tobeusedinitsresearchanddevelopmentdepartment.Themachinehasanestimatedusefullifeof5yearsandasalvagevalueof50,000. The machine can be used in the company's regular production activities after the current R&D project is completed in two years. Apex uses the straight-line method of depreciation.

What amount of expense related to this machine should Apex include in its research and development expense for Year 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 (500,000−500,000 - 500,000−50,000) / 5 years = $90,000 per year. This amount is the R&D expense for Year 1.

Question 2

Cortex Software is developing a new software product to be sold to customers. During the year, the company incurred $150,000 in costs related to planning, designing, and testing activities that occurred before technological feasibility was established.

How should Cortex Software account for the $150,000 of costs incurred?

  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

Nimbus Tech Inc. is developing a new software product to be sold. During the year, Nimbus incurred the following costs:

  • Planning and conceptual design: $50,000
  • Coding and testing before establishing technological feasibility: $120,000
  • Coding and testing after establishing technological feasibility: $200,000
  • Production of product masters for training materials: $30,000

What is the total amount of costs that Nimbus should capitalize as a software development asset for the year?

  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)andtheproductionofproductmasters(200,000) and the production of product masters (200,000)andtheproductionofproductmasters(30,000). The total amount to be capitalized is 200,000+200,000 + 200,000+30,000 = 230,000.Costsincurredbeforetechnologicalfeasibility(230,000. Costs incurred before technological feasibility (230,000.Costsincurredbeforetechnologicalfeasibility(50,000 + $120,000) must be expensed as R&D.

Question 4

Venture Corp. paid $400,000 to acquire a specific research project from another company. The transaction was an asset acquisition, not a business combination. The assets acquired in the project have no alternative future use for Venture Corp.

What is the correct accounting treatment for the $400,000 payment by Venture Corp.?

  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

A company has just completed the R&D phase for a new, patentable manufacturing process. The company incurred 500,000 in R&D costs to develop the process. In addition, the company paid 35,000 in legal and filing fees to secure the patent.

What is the total amount of costs that should be capitalized as an intangible asset related to the new process?

  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)incurredtodevelopaproductorprocessmustbeexpensedasincurred.However,thelegalfeesandotherdirectcostsassociatedwithsecuringapatent(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 (500,000)incurredtodevelopaproductorprocessmustbeexpensedasincurred.However,thelegalfeesandotherdirectcostsassociatedwithsecuringapatent(35,000) are capitalized as an intangible asset (the patent) and amortized over its legal or useful life, whichever is shorter.

Question 6

Which of the following activities would be excluded from research and development costs under U.S. GAAP?

  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

On January 1, Year 1, ByteCorp capitalized 600,000ofsoftwaredevelopmentcostsforanewproductwithanestimatedfive−yearusefullife.Thesoftwarewasmadeavailableforsaleonthisdate.InYear1,revenuesfromthesoftwarewere600,000 of software development costs for a new product with an estimated five-year useful life. The software was made available for sale on this date. In Year 1, revenues from the software were 600,000ofsoftwaredevelopmentcostsforanewproductwithanestimatedfive−yearusefullife.Thesoftwarewasmadeavailableforsaleonthisdate.InYear1,revenuesfromthesoftwarewere200,000. Total anticipated revenues over the software's life are $1,000,000.

What is the correct amount of amortization expense for the capitalized software that ByteCorp should record for Year 1?

  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: 600,000/5years=600,000 / 5 years = 600,000/5years=120,000.
  2. Revenue ratio: (200,000currentrevenue/200,000 current revenue / 200,000currentrevenue/1,000,000 total anticipated revenue) * 600,000=0.20∗600,000 = 0.20 * 600,000=0.20∗600,000 = 120,000.Sincebothmethodsresultin120,000. Since both methods result in 120,000.Sincebothmethodsresultin120,000, the amortization expense is $120,000.

Question 8

Under U.S. GAAP, technological feasibility for a computer software product to be sold to customers is established when the entity has completed which of the following?

  1. A business plan and market feasibility study.
  2. The coding and initial testing of the software.
  3. A detailed program design or a working model. (correct answer)
  4. The final beta testing with potential customers.

Explanation: According to ASC 985-20, technological feasibility is established upon completion of a detailed program design or, in its absence, completion of a working model that has been tested to be consistent with the product's design specifications. The other options represent activities that occur either before (business plan) or after (beta testing) the point of technological feasibility.

Question 9

At December 31, Year 2, a company's balance sheet included capitalized software costs of 800,000.Duetoanewcompetitor,theexpectedfuturenetcashflowsfromthesoftwareareestimatedtobeonly800,000. Due to a new competitor, the expected future net cash flows from the software are estimated to be only 800,000.Duetoanewcompetitor,theexpectedfuturenetcashflowsfromthesoftwareareestimatedtobeonly500,000. The fair value of the software is estimated at $450,000.

What journal entry should the company record at December 31, Year 2?

  1. $300,000 (correct answer)
  2. Debit Impairment Loss for 350,000;CreditCapitalizedSoftwareCostsfor350,000; Credit Capitalized Software Costs for 350,000;CreditCapitalizedSoftwareCostsfor350,000.
  3. Debit Retained Earnings for 300,000;CreditCapitalizedSoftwareCostsfor300,000; Credit Capitalized Software Costs for 300,000;CreditCapitalizedSoftwareCostsfor300,000.
  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)exceedstheNRV(800,000) exceeds the NRV (800,000)exceedstheNRV(500,000), an impairment loss of 300,000(300,000 (300,000(800,000 - 500,000)mustberecognized.Theentryis:DebitImpairmentLoss500,000) must be recognized. The entry is: Debit Impairment Loss 500,000)mustberecognized.Theentryis:DebitImpairmentLoss300,000; Credit Capitalized Software Costs $300,000.

Question 10

After completing research and development on a new manufacturing process, a company incurred additional costs for troubleshooting issues that arose during the initial commercial production run.

How should the company account for these troubleshooting costs?

  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 11

Zenith Corp. had the following project costs during the year:

  • Project Alpha: Basic research to discover a new polymer. Total costs: $300,000.
  • Project Beta: Development of a new software to be sold to the public. Costs before reaching technological feasibility were 100,000;costsafterreachingtechnologicalfeasibilitywere100,000; costs after reaching technological feasibility were 100,000;costsafterreachingtechnologicalfeasibilitywere150,000.
  • Project Gamma: Routine engineering follow-through on an established production line. Total costs: $75,000.

What is the total research and development expense Zenith Corp. should report for the year?

  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,plusthecostsforProjectBetaincurredbeforetechnologicalfeasibility(300,000, plus the costs for Project Beta incurred before technological feasibility (300,000,plusthecostsforProjectBetaincurredbeforetechnologicalfeasibility(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=100,000 = 100,000=400,000.

Question 12

Which of the following disclosures is required by U.S. GAAP in the financial statements regarding research and development costs?

  1. A detailed schedule of all major R&D projects currently in progress.
  2. The total amount of R&D costs charged to expense for each period presented. (correct answer)
  3. Management's estimate of the remaining costs to complete key R&D projects.
  4. The amortization expense for the period related to previously capitalized R&D.

Explanation: ASC 730 requires that the financial statements disclose the total amount of research and development costs charged to expense for each period for which an income statement is presented. The other options, while potentially useful information, are not required disclosures under U.S. GAAP.

Question 13

Quantum Labs performs contract research and development services for other companies. During the year, Quantum was paid 500,000byamajorpharmaceuticalcompanytoconductaclinicaltrial.Quantumincurred500,000 by a major pharmaceutical company to conduct a clinical trial. Quantum incurred 500,000byamajorpharmaceuticalcompanytoconductaclinicaltrial.Quantumincurred350,000 of costs (salaries, materials, etc.) in performing this service.

How should Quantum Labs classify the $350,000 of costs incurred in its income statement?

  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 14

A company is developing a new enterprise resource planning (ERP) system for its own internal use. The project has several stages.

At which point should the company begin capitalizing the direct costs of materials and services and the payroll costs for employees working on the project?

  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 15

ChemCo received a 1,000,000grantfromagovernmentagencytoperformresearchonanewbiodegradableplastic.Duringtheyear,ChemCoincurred1,000,000 grant from a government agency to perform research on a new biodegradable plastic. During the year, ChemCo incurred 1,000,000grantfromagovernmentagencytoperformresearchonanewbiodegradableplastic.Duringtheyear,ChemCoincurred750,000 of qualifying R&D expenditures under the terms of the grant.

How should ChemCo report the $750,000 of R&D expenditures in its income statement?

  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 16

A corporation's research and development department is housed in a building that is also used by the company's manufacturing and administrative departments. The total depreciation expense on the building for the year is $200,000. The R&D department occupies 25% of the building's space.

What is the appropriate accounting treatment for the building's depreciation expense?

  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,whichis200,000, which is 200,000,whichis50,000, should be included in R&D expense.

Question 17

Proton Inc. incurred significant costs related to a radical redesign of its flagship product to incorporate new technology, which is expected to double the product's efficiency.

How should Proton Inc. account for the costs associated with this radical redesign?

  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 18

Mega Corp. acquired a smaller company, Innovate Co., in a business combination. As part of the acquisition, Mega Corp. acquired an in-process research and development (IPR&D) project from Innovate. The project has not yet reached technological feasibility and has no alternative future use. The fair value of the IPR&D project was determined to be $2,000,000.

How should Mega Corp. account for the $2,000,000 of acquired IPR&D?

  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 19

Helix BioTech Inc. purchased highly specialized equipment for $220,000 for use in a single, specific research and development project. The equipment has no alternative future use for Helix after the project is completed, and its salvage value is considered negligible.

What is the appropriate accounting treatment for the cost of this equipment in the year of purchase?

  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 20

During the current year, Nova Corp. incurred the following costs related to the development of a new product:

  • Salaries of scientists and technicians engaged in research: $250,000
  • Materials and supplies consumed in R&D projects: $90,000
  • Depreciation on equipment used exclusively for R&D activities: $40,000
  • Marketing research to determine customer demand for the new product: $30,000
  • Quality control testing during commercial production: $25,000
  • Legal fees for patent application on the new product: $15,000

Based on the information provided, what is the total amount Nova Corp. should report as research and development expense for the current year?

  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)=40,000) = 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.