Miller Company acquired a machine for $420,000 on June
30, year 2. The machine has a seven-year life, no salvage value,
and was depreciated using the straight-line method. On August
31, year 4, a test for recoverability reveals that the expected net
future undiscounted cash inflows related to the continued use and
eventual disposal of the machine total $275,000. The machine’s
actual fair value on August 31, year 4, is $261,000. Assuming a
loss on impairment is recognized August 31, year 4, what is Miller’s
depreciation expense for September year 4?
In January year 4, Vorst Co. purchased a mineral mine for
$2,640,000 with removable ore estimated at 1,200,000 tons. After
it has extracted all the ore, Vorst will be required by law to restore
the land to its original condition at an estimated cost of $220,000.
The present value of the estimated restoration costs is $180,000.
Vorst believes it will be able to sell the property afterwards for
$300,000. During year 4, Vorst incurred $360,000 of development
costs preparing the mine for production and removed and
sold 60,000 tons of ore. In its year 4 income statement, what
amount should Vorst report as depletion?
Brunson Corp., a major US winery, begins construction of a
new facility in Italy. Following are some of the costs incurred in
conjunction with the start-up activities of the new facility:
Production equipment $815,000
Travel costs of salaried employees 40,000
License fees 14,000
Training of local employees for production
and maintenance operations 120,000
Advertising costs 85,200
What portion of the organizational costs will be expensed?
(b) Start-up activities are defined broadly as those onetime
activities related to opening a new facility as well as introducing
a new product or service and conducting business in a
new territory. Certain costs that may be incurred in conjunction
with start-up activities are not subject to these provisions. These
costs include the costs of acquiring long-lived assets such as production
equipment, costs of advertising, and license fees. Answer
(b) which includes the costs of training local employees
($120,000) and travel costs of salaried employees ($40,000) is
the correct answer.
On January 1, year 4, Kew Corp. incurred organization costs
of $24,000. What portion of the organization costs will Kew defer
to years subsequent to year 4?
(d) Organization costs are those incurred in the formation
of a corporation. These costs should be expensed as incurred.
The rationale is that uncertainty exists concerning the
future benefit of these costs in future years. Thus, they are
properly recorded as an expense in year 4.
Which of the following statements is(are) correct regarding
the treatment of start-up activities related to the opening of a new
I. Costs of raising capital should be expensed as incurred.
II. Costs of acquiring or constructing long-lived assets and getting
them ready for their intended use should be expensed as
III. Cost of research and development should be expensed as
(b) The costs of raising capital and the costs of acquiring
or constructing long-lived assets and getting them ready for their
intended use are not expensed as incurred. Such costs should be
accounted for in accordance with other existing authoritative
accounting literature. Research and development (R&D) costs
are expensed as incurred.
Cody Corp. incurred the following costs during year 4:
Design of tools, jigs, molds, and dies involving
new technology $125,000
Modification of the formulation of a process 160,000
Troubleshooting in connection with breakdowns
during commercial production 100,000
Adaptation of an existing capability to a particular
customer’s need as part of a continuing commercial activity 110,000
In its year 4 income statement, Cody should report research and
development expense of
(d) Among those items listed as being part of R&D costs
are design of tools, jigs, molds, and dies involving new technology
($125,000) and modification of the formulation of a process
($160,000), for a total R&D expense of $285,000. Included in
the items not being part of R&D costs are troubleshooting
breakdowns during production ($100,000), and adaptation of
existing capability for a specific customer ($110,000).
In year 4, Ball Labs incurred the following costs:
Direct costs of doing contract research and
development work for the government to be
reimbursed by governmental unit $400,000
Research and development costs not included above were
Indirect costs appropriately allocated 200,000
What was Ball’s total research and development expense in year
(b) All R&D costs must be expensed when incurred.
However, R&D costs incurred when performing R&D work under
contract for other entities are specifically excluded from the
reporting requirements. Generally such costs are deferred and
matched with revenue under the completed-contract or percentage-
of-completion method. The other costs listed would all be
expensed in year 4. Therefore, Ball’s year 4 research and development
expense is $1,380,000 ($300,000 + $700,000 + $200,000
West, Inc. made the following expenditures relating to Product
• Legal costs to file a patent on Product Y—$10,000. Production
of the finished product would not have been undertaken
without the patent.
• Special equipment to be used solely for development of
Product Y—$60,000. The equipment has no other use
and has an estimated useful life of four years.
• Labor and material costs incurred in producing a prototype
• Cost of testing the prototype—$80,000.
What is the total amount of costs that will be expensed when incurred?
(c) All R&D costs are to be charged to expense when
incurred. Specifically R&D costs include designing, constructing,
and testing preproduction prototypes, and the cost of R&D
equipment (unless it has alternative future uses). Therefore,
$340,000 ($60,000 + $200,000 + $80,000) is classified as R&D
costs and expensed. The legal costs incurred to obtain a patent
($10,000) are capitalized in the patents account.
Brill Co. made the following expenditures during year 4:
Costs to develop computer software for internal
use in Brill’s general management information
Costs of market research activities 75,000
What amount of these expenditures should Brill report in its year
4 income statement as research and development expenses?
(d) The FASB excludes from its definitions of research
and development expense the acquisition, development, or improvement
of a product or process for use in its selling or administrative
activities. Both costs given in this problem relate
to selling or administrative activities, so the expenditures of
$175,000 would not be reported as research and development
On January 1, year 4, Jambon purchased equipment for use
in developing a new product. Jambon uses the straight-line depreciation
method. The equipment could provide benefits over a
ten-year period. However, the new product development is expected
to take five years, and the equipment can be used only for
this project. Jambon’s year 4 expense equals
(a) Research and development costs are expensed as
incurred except for fixed assets, intangible assets, or materials
purchased that have alternative future uses. Jambon purchased
equipment to be used for research and development, but the
equipment can only be used for that project. Therefore, the cost
of the equipment must be expensed in year 4 as it has no alternative