Final answer:
The cost of equipment with an alternative future use that is purchased for R&D should be capitalized and depreciated over its useful life, not expensed immediately or only when retired. This treatment aligns with GAAP and ensures financial statements accurately reflect the company's financial health over time. Option 1) capitalized and depreciated as R&D expense in the current and future periods is the correct answer.
Step-by-step explanation:
If equipment is purchased for research and development (R&D), but has an alternative future use, the accounting treatment of this cost can be unique. The cost of the equipment should not be expensed immediately as an R&D expense. Instead, the cost should be capitalized and then depreciated over its useful life. The rationale behind this approach is that the equipment has future utility beyond the current R&D efforts, thus the benefits of the equipment are spread over multiple periods. Recognizing the expense over time through depreciation aligns the cost with the periods in which the benefits are received, ensuring that the financial statements accurately reflect the company's health and performance.
This method of capitalization and subsequent depreciation is consistent with Generally Accepted Accounting Principles (GAAP), which aim to provide a clear picture of a company's financial situation. Expensing such costs immediately would not reflect the future benefits and could distort the firm's profitability and financial position in the current period. In addition to the accounting treatment, tax breaks for R&D can affect how research funding is spent. Policies like the research and experimentation (R&E) tax credit encourage companies to invest more in R&D by providing a reduction in taxes proportional to the amount spent on R&D. This indirectly influences accounting decisions as well, making the option to capitalize and gradually depreciate R&D assets more favorable, given that tax credits can offset some of the costs.