Deferred development costs relate to products in commercial production. All additional costs of development are deferred once Phase III approval is obtained. The costs are depreciated straight-line over 10 years. Is the method of accounting used by the company for non-monetary exchange of capital assets appropriate? If not, what do you recommend and why? Based on your recommendation, you need to revise the balance sheet with supporting journal entries and calculations.

Motion Biotech Inc. (MBI), a Canadian company, was founded by Dr. James Clarkson six years ago. Clarkson has a PhD in organic chemistry and is guiding his team of scientists as they develop all- natural products to help deal with the damage caused by repetitive stress injuries. The demand for this type of product is expected to grow as baby boomers age and continue their active lifestyles. Initially, all the capital came from Clarkson and government grants. Several venture capital funds became investors two years ago. As a result, 40% of the common shares are held by three venture capital funds, and Clarkson owns 60%. The venture capital investors are looking forward to a public offering of MBI shares, likely when the company has at least one more product in commercial development. Biotech firms have significant hurdles to clear before a product can be commercially marketed. These products are subject to significant government regulation, in three phases. Phase I testing must establish product safety with animals. Phase II testing must establish product safety with humans, and Phase III clinical trials, the most expensive and risky, must establish that the product is effective for treating the condition for which it is designed. Fewer than 30% of Phase I compounds reach commercial production. The major risks are that the product will not be safe or effective; or that another treatment, a competitor product, will be developed that is more effective. However, once product approval is received, profit margins are very high-80 to 90%. MBI has two products in commercial production, one product in Phase III testing, and two products in Phase II testing. A number of other compounds are in the lab and are being considered for Phase I testing. The two products in commercial production have been modest successes, but not blockbusters. MBI hired a reputable marketing research company, which reported that there is significant demand for MBI's proposed products, that is, those still being developed. There is significant interest in the product now in Phase III testing, as the condition that it will treat is widespread. You, an independent accountant, have been approached by one of the venture capital investors with a common share investment in MBI. The MBI balance sheet (draft copy) and some additional information have been provided to you (Exhibit). However, the income statement, cash flow statement, and disclosure notes are not available. You understand that MBI will report a loss of about $2.3 million this year, which is largely the result of expenditures of $2.1 million for the product in Phase III testing. Clarkson has described the loss as a good thing, because it demonstrates our commitment to Phase III testing of a product with significant commercial potential. Clarkson is unhappy that these costs have not been deferred, as they represent a major investment in a future revenue-producing product. The venture capital investor is interested in any financial statement adjustments that you feel are necessary. He would like to see the dollar amount (you may ignore tax), where possible, and rationale for any change you suggest to MBI's financial information. ,,,, ,,, Exhibit: Motion Biotech Inc. Draft Copy of Balance Sheet as at December 31, 2019 Current assets Cash $_549.059 Inventories 11,6514 Total current assets 560,7102 Long-term assets Investment in Star Tech (Note 1) 60,000 Deferred development costs (Note 2) 112,250 Leasehold improvements (Note 3) $ 103,445 te Less: accumulated depreciation (31,034) 72,41142 Equipment (Note 4) 50,876 Less: accumulated depreciation (15,088) 35,7884 Total long-term assets 280,449