Question 3

You have been given the following financial data of a research project from the chief researcher of Balloon Ltd:

$

Cost to date (pure research 25%, applied research 75%) 600,000

Cost to develop the product in 2018 900,000

Expected future sales per annum in 2019 3,000,000

Fixed assets purchased in 1 January 2018 for the project:

Cost 7,500,000

Estimated useful life 5 years

Residual value 120,000

The board of directors considers this project to be similar to other projects that the company has undertaken and is confident of a successful outcome.

The company has sufficient resources to complete development and has sufficient capacity to produce the product.

Required:

a Prepare a report to the board outlining the principles involved in accounting for research and development, and

showing what accounting entries need to be made in the financial year 2018. (12 marks)

b Explain what factors need to be taken into account when assessing a research and development project for accounting purposes and

what disclosures are needed for research and development in Balloons financial statements. (13 marks)