The Thomas Company is in the process of developing a revolutionary new product. A new division of the company was

formed to develop, manufacture, and market this product. As of

year-end (December 31, 2020), the product has not been manufactured for resale; however, a prototype unit was built and is in operation.

Throughout 2020, the division incurred certain costs.

These costs include design and engineering studies, prototype manufacturing costs, administrative expenses (including

salaries of administrative personnel), and market research

costs. In addition, $500,000 in equipment (estimated useful life: 10 years) was purchased for use in developing and

manufacturing the preproduction prototype and will be

used to manufacture the product. Approximately $200.000

of this equipment was built specifically for the design and

development of the product; the remaining $300,000 of equipment will be used to manufacture the product once it is in

commercial production.

a. How is research and development defined in Statement of

Financial Accounting Standards No. 2?

b. Briefly indicate the practical and conceptual reasons for the

conclusion reached by the FASB on accounting and reporting practices for R&D costs.

c. In accordance with SFAS No. 2, how should the various costs

of Thomas just described to be reported in the financial statements for the year ended December 31, 2020?