Deal qualification for research and development

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hello and welcome to this session in which we would look at an exercise that deals with research and development cost or research and development expense how do we compute research and development costs what are the rules so you need to know whether an item is expense as research and development or if it's not an expense remember every time we spend money every time the company incur an expenditure we have to determine whether this expenditure is an expense or an asset simply put are we going to expense the item or are we going to capitalize it capitalizing means treating it as an asset now for research and development cost it's pretty straightforward we basically the general rule is we basically expense practically everything yes practically everything but we have to be careful because we always have those special rules when it comes to accounting things that we need to be aware of before we expense so this exercise will help you determine illustrate the concept where you have to be very careful in placing this item as an expense or as an asset now if you're watching most likely you are a student or a cpa candidate either or you're welcome thank you that you are watching but what i suggest you do is to go to farhatlectures.com for additional resources multiple choice through false i don't replace your cpa review course i can help you do better i can help you do better in your courses please check out my website for the first item we purchased a piece of equipment the cost of the equipment is three hundred thousand however the equipment will have alternative uses in future r d project over the next five years we are using the straight line and we purchase the equipment january 1st now generally speaking when you hear the word research and development and equipment although it's a piece of equipment a copier a printer a laboratory if it's for rnd we expense so you would say okay what should we do now you have to be very careful in this example the equipment will have alternative uses in research and development what does that mean it means this piece of equipment is not solely devoted for this project it means we have to split the cost for this project as well as other projects so how do we do so well through the appreciation we're going to have thousand dollar piece of equipment we're gonna depreciate it over five years five years not six and every year we are going to take depreciation expense of sixty thousand now we have a depreciation expense credit accumulated depreciation then what we do for 60k and 60k i'm just going to show you what happened then we're going to debit rnd expense and credit depreciation expense simply put take it out of the expense take it out of the depreciation expense and put it into rnd expense okay so take it out of depreciation expense and put it into r d so we have to be careful if the asset has alternative use be careful and this is how they will try to trick you on the cpa exam material consumed an r d project well again as i said every time you hear the word rnd you would say it's an expense so it's an expense so we're starting with sixty thousand of the appreciation plus sixty one thousand of material consumed consulting fees paid to outsider for our nd project now you might be saying hold on but this is not we're not paying our employees we're paying outsiders nevertheless it's an rnd it's expensed 102. personnel cost of persons involved in r d project of course we are going to expense this as rnd 134 so whether it's whether we are paying our our own employees our own personnel or paying an outsider as long as those expenditure are related to the rnd project then it is r d indirect cost reasonably allocated to rnd well now these costs are not direct but they're like indirect maybe uh maybe the cost of a janitor security other other costs that partially support the process well if it's reasonably allocated then it's rnd plus 54 000. material purchase for future r d project 34 000 just be careful here the material purchased is not consumed as of yet it's for future r d project simply put this is basically a form of prepaid why think about it we can change our mind maybe we will scrap the future project maybe we would return those items maybe we'll use them for something else other than the rnd project well what we have to do we have to wait because we just purchased them we did not use them yet once we use them in the rnd project we will expense them so those are the expenditure for rnd if my math is right the total r d should be four hundred and eleven thousand what should you do now once again i'm gonna invite you to go to farhat lectures dot com work mcqs multiple choice through false questions that's gonna help you do better in your course on the cpa exam invest in yourself and invest in your career don't shortchange yourself good luck study hard and of course stay safe