Utopia Inc. (Utopia) is a biotechnology company located in Montral. Utopia has successfully marketed a number of

Utopia Inc.

(Utopia) is a biotechnology company located in Montréal. Utopia has successfully marketed a number of products since it went public three years ago. Biotechnology is a highly competitive industry and a company’s decline in the marketplace is no further away than a competitor’s dramatic scientific breakthrough. To remain competitive, companies must invest heavily in research and development to ensure they have a pipeline of new medicines to bring to market.

Utopia prepares its financial statements in accordance with IFRS, so it expenses all research costs and any development costs that don’t meet the criteria for capitalization.

To date, none of Utopia’s development costs have met the criteria for capitalization.

The following information has been summarized from Utopia’s financial statements:

Required:

a. Recalculate net income for 2014 through 2016 assuming that R&D costs were capitalized and expensed over three years using straight-line amortization.

b. What would total assets be at the end of 2014 through 2016 if R&D costs were capitalized and amortized over three years?

c. What would shareholders’ equity be at the end of 2014 through 2016 if R&D costs were capitalized and amortized over three years?

d. What would cash from operations and cash expended on investing activities be if R&D costs were capitalized and amortized over three years?

e. What would the following ratios be assuming that (1) R&D costs were expensed as incurred and (2) R&D costs were capitalized and amortized over three years?
Assume that Utopia didn’t have an interest expense over the period 2012-2016.
1, return on assets ii. debt-to-equity ratio ili. profit margin percentage

f. How would your interpretation of Utopia differ depending on how R&D costs are accounted for? Which accounting approach do you think is more appropriate?
Explain. Your answer should consider the objectives of the stakeholders and the managers who prepare the accounting information, as well as the accounting concepts discussed throughout the book.

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Summarized from the income statement Utopia Inc. Extracts from Financial Statements 2016 2015 2014 2013 2012 Revenue. $3,984,750 $2,488,750 $1,677,500 $467,500 $ 13,750 Expenses* 1,793,000 1,194,600 855,250 552,750 412,500 R&D expenditures 2,475,000 1,925,000 1,100,000 412,500 275,000 Net loss (283,250) (630,850) (277,750) (497,750) (673,750) Summarized from the balance sheet Total assets 6,943,750 6,179,250 5,802,500 1,787,500 770,000 Total liabilities 2,708,063 2,224,530 2,030,875 750,750 346,500 Total shareholders' equity 4,235,687 3,954,720 3,771,625 1,036,750 423,500 Summarized from the cash flow statement Cash from operations Cash expended on investing activities 343,750 (495,000) (225,500) (385,000) (825,000) (550,275) (679,250) (2,942,500) (962,500) (522,500) *Includes all expenses incurred by Utopia except for research and development.