Greene Motors, Ltd. recently entered the auto-mobile industry by introducing its first fully electric vehicle, the Bolt. The Bolt is the first of many planned vehicles Greene will produce. In order to expand its product line, Greene requires a state- of- the- art testing facility and a new research and development laboratory. The following transactions are related to Greene’s research and development activities.
1. Constructed a new testing facility at a cost of $ 14,000,000. The facility is estimated to have a 20- year economic life and a $ 4,000,000 residual value at the end of that time. The facility will be depreciated using the straight- line method. Within the new facility, Greene made the following expenditures to conduct its research and development ( R& D) activities:
2. Purchased R& D equipment for $ 568,000. The equipment has a five- year life and no residual value. The equipment will be depreciated using the straight- line method.
3. Acquired testing materials and supplies at a cost of $ 125,000. Research projects consumed 70% of the materials and supplies in the current year.
4. Developed a prototype for a new battery called the Powerizer. The prototype cost $ 265,700 for development and testing.
5. Paid $ 168,500 in salaries and wages for testing activities.
6. Obtained a patent for the Powerizer. The patent application and legal fees to successfully defend the patent amounted to $ 560,000. The economic life of the patent is seven years.
7. Acquired Bizet Automotive Suppliers, Inc. at the beginning of the current year. As part of the transaction, Greene acquired in- process R& D for $ 356,700. Subsequent R& D expenditures for these projects amounted to $ 120,000. The acquired projects continue in development for two more years. 8. Recorded all required depreciation and amortization at the end of the year.
Required
a. Prepare the journal entries to record each of the transactions, assuming all purchases were made with cash. Assume the transactions occurred on January 1.
b. Indicate the effects of these transactions on the current year- end balance sheet (excluding the effects on the cash balance), income statement, and cash flow statement under the direct and indirect methods.