Research and development

Panorama Ltd manufactures and distributes a wide range of general pharmaceutical products. Selected audited data for the reporting period ended 31 December 2011 are as follows:

Gross profit 17,600,000

Profit before tax 1,700,000

Income tax expense 500,000

Profit for the period 1,200,000

Total assets:

Current 7,300,000

Non-current 11,500,000

The company uses a standard mark-up on cost.

From your audit files, you ascertain that total research and development expenditure for the year amounted to $4,700,000. This amount is substantially higher than in previous years and has eroded the profitability of the company. Mr Paniq, the company