Accounting for Research and Development

The Thomas Company is in the process of developing a revolutionary new product. A new division of the company was formed to develop, manufacture, and market this product. As of year-end (December 31, 2018), the product has not been manufactured for sale, however, a prototype unit was built and is in operation.

Throughout 2018, the division incurred certain costs. These costs include design and engineering studies, prototype manufacturing costs, administrative expenses (including salaries of administrative personnel, and market research costs. In addition, $500,000 in equipment (estimated useful life: 10 years) was purchased for use in developing and manufacturing the preproduction prototype and will be used to manufacture the product. Approximately $200,00 of this equipment was built specifically for the design and development of the product; the remaining $300,000 of equipment will be used to manufacture the product once it is in commercial production.

Required: Respond to the following questions. Include your sources.

a. How is research and development defined in SFAS No. 2?

b. Briefly indicate the practical and conceptual reasons for the conclusion reached by the FASB on accounting and reporting practices for R & D costs.

c. In accordance with SFAS No. 2, how should the various costs of Thomas just described be reported in the financial statement for the year ended December 31, 2018?

d. In addition to the FASBs statement on R&D activities, the EITF has addressed three implementation issues. List and briefly summarize each of these issues.

Your responses should be concise but sufficient to address the issues. At least two but not more than three total pages not including reference page. No title page is necessary.