Clonal Inc., a biotechnology company, developed and patented a diagnostic product called Trouver. Clonal purchased some research equipment to be used exclusively for Trouver and other research equipment to be used on Trouver and subsequent research projects. Clonal defeated a legal challenge to its Trouver patent and began production and marketing operations for the product.

Clonal allocated its corporate headquarters costs to its research division as a percentage of the divisions salaries.

Required:

1. What is the definition of research and of development as defined by GAAP?
2. Briefly indicate the justification for the existing GAAP relating to R&D costs.
3. Explain how Clonal should report the equipment purchased for Trouver on its income statements and balance sheets.
4. Explain how Clonal should report the legal costs incurred in defending Trouvers patent on its statement of cash flows.
5. Explain how Clonal should classify its corporate headquarters costs allocated to the research division on its income statement.