Question 2

An entity has incurred the following expenditure during the current year:

(a) $100,000 spent on the initial design work of a new product it is anticipated that this design will be taken forward over the next two-year period to be developed and tested with a view to production in three years' time.

(b) $500,000 was spent on the testing of a new production system that has been designed internally and will be in operation during the following accounting year. This new system should reduce the costs of production by 20%.

How should each of these costs be treated in the financial statements of the entity?