A manufacturer of plastic products spent $2,400,000 during the course of 2004 on research and development. $800,000 of this was spent on an unsuccessful attempt to design new and cheaper moulds which would have lasted twice as long as the moulds currently in use; this proved impossible because the moulds would not sustain the temperature of the molten plastic. $1,200,000 was spent on a very successful project to enable the gnomes to be cast in a cheaper form of plastic, and the remaining $400,000 was spent in the rental, heating and lighting costs of the research and development office.

Required: Advise the manufacturer how the expenditure of $2,400,000 should be treated in the income statement (Statement of Profit & Loss) and balance sheet (Statement of Financial Position). Explain your reasoning carefully and indicate any assumptions you make.