In 2021 McGoy Ltd decided to develop a surfboard out of a new type of material that was resistant to damage. The material to be used was more like plastic than the fibreglass traditionally used on surfboards. In 2021 McGoy Ltd spent $510 000 on research aimed at understanding the properties of different types of plastics. This knowledge provided what the company considered to be a significant breakthrough, which if utilised should lead to significant future economic benefits.

In 2022 McGoy Ltd developed a prototype of its surfboard. It asked several leading surfers to ride its surfboard at the annual Rip Curl Pro Event at Bells Beach. The costs involved in developing the prototype in 2022 were $ 780,000. The reaction to the new surfboard was positive and many major retailers put in orders for the board. Anticipating the demand, McGoy Ltd had spent $ 25,000 on legal costs to register a patent for the board. The patent has a life of five years, after which time other producers may copy the surfboard design.

Because of the positive reaction, in 2023 McGoy Ltd undertook worldwide marketing of the surfboard at a cost of $2 200 000. It became apparent that demand for this new surfboard was huge and, within four months, orders for over $40 million dollars’ worth of the boards had been received. McGoy Ltd employed a firm of accountants to work out the present value of the new surfboard and they believed that the product had a present value of at least $200 million. The managing director of McGoy Ltd then decided that he would like to have the present value of the surfboard reflected in the company’s financial statements; that is, he wanted it to be valued at its fair value. While his accountants considered that the present value was $200 million, a major competitor made a legally binding offer to buy the patent for the product at a price of $150 million.

REQUIRED

Describe how to account for the above transactions and events and provide appropriate journal entries.