Reference no: EM132960927
The following information is related to the company Ralcom plc. 1. It started a research & development project on 1 January 2017. On 1 April 2017 the viability of the project was confirmed and the directors agreed that the final product would be produced for sale. The first sale of the product took place on 1 September 2017. It is estimated that the product would have a sales life of four years and that the sales revenue will be constant over the years.
The costs incurred during 2017 and paid in cash are as follows:
£500,000 was paid for laboratory research aimed at discovery of new knowledge and £400,000 was incurred in relation to the search for application of new research findings.
1. In April 2017 a prototype product was designed. The wages of staff constructing the prototype amounted to £1,200,000. Material and overhead costs of the prototype were £850,000. The prototype testing costs were £450,000 and the engineering costs incurred once technical feasibility reached to advance the product to full production stage were £700,000.
2. It purchased a brand in 2000 for £2 million. The directors believe the brand is worth £7 million as at 31 December 2017.
3. It acquired a patent in January 2012, with ten years left to run, for £350,000.
4. It bought a fishing quota to catch 1,000 tonnes of fish for £1,000 per tonne on 1 January 2017. The market value for the quota, for which there is an active market, was £1,400 per tonne on 31 December 2017.
5. It acquired a bus operating licence on 30 June 2017 to operate routes for the next eight years. The initial price was £480,000.
6. A further £120,000 is payable on 1 January 2018. In addition, the company spent £9,000 for training employees to operate the routes.
7. A major advertising campaign costing £125,000 was carried out in autumn of 2017. The directors believe the main benefits of this campaign will arise in 2018.
The accounting policy of the company in respect of intangible assets is as follows.
a. The R&D costs which meet the criteria for capitalization are amortised over the period of the expected future sales of the product. Once the sale commences, the amortization charge is written off to the profit and loss account. Full annual amortization is charged to the P/L account in the year in which the sale or production starts.
b. Depreciation is calculated on a straight line basis over:
(i) Quota 20 years
(ii) Brands. 20 years
(iii) Patents and licences remaining legal life when acquired
c. Valuation:
Intangible assets for which there is an active market are revalued annually. They are depreciated on its cost until the revaluation occurs. Any impairment value is recognized immediately in the Income Statement.
Required:
Problem a. Explain how each of the above items should be dealt with in the accounts of Ralcom plc for the year to 31 December 2017.
Problem b. Record the accounting entries to show the movements on the relevant accounts for the year to 31 December 2017 for each of the items above. Calculate the net book values as at 31 December 2017 where appropriate.
Problem c. Discuss the extent to which the costs incurred in research and development qualify for asset recognition.