Amesbury plc produces and distributes computer-controlled machinery. As accountant for the company, you have been provided with the following information regarding the company’s activities in researching and developing products in the year ended 31 October 1993:

(1) Expenditure on developing a new computerised tool for a long-established customer has amounted to £150 000. The work is now well advanced and the customer is likely to authorise the start of commercial production within the next 12 months. The customer is reimbursing Amesbury plc’s costs plus a 10% mark-up. To date the company has received £70000 having invoiced £100000 for agreed work done.

(2) A review of the company’s quality control procedures has been carried out at a cost of

£100 000. It is considered that the new procedures will save a considerable amount of money in the testing and analysis of existing and new products.

(3) The development of Product M479 has reached an advanced stage. Costs in the year ended 31 October 1993 amounted to £400 000. In addition there has been expenditure on fixed assets required for the development of this product amounting to

£120 000 of which £60 000 was incurred in the year ended 31 October 1992. The fixed assets have a five-year life with no residual value and are depreciated on the straight-line basis with a full year’s depreciation in the year of acquisition.

Market research, costing £20 000, has been carried out and this indicates the product will be commercially viable although commercial production is unlikely to start until April 1994. The company expects that Product M479 will make a significant contribution to profit.

(4) Commercial production started on 1 June 1993 for Product A174. The costs of developing this product had been capitalised as follows:

The company has taken out a patent which will last for ten years. The associated legal and administrative expenses amounted to £10000.

Actual and estimated sales for Product A174:

After 31 October 1996 the company’s market share and profitability from the product are expected to diminish significantly due to the introduction of rival products by competitors.
(5) It is company policy to capitalise development expenditure wherever possible.
Requirement Prepare all relevant extracts of the published financial statements for the year ended 31 October 1993 in accordance with current accounting standards and legislation, explaining your treatment of items (1) to (4).
Note: You are not required to prepare extracts of the cash flow statement or the directors’
report.
ICAEW, Financial Reporting, November 1993 (15 marks)

Transcribed Image Text:

Development expenditure capitalised as on 31 October 1992 Expenditure incurred in the year ended 31 October 1993 200000 50000 250000