Question

Northern Company incurred the following costs during the year related to the creation of a new product:

Salaries
200,000
Depreciation on R D equipment50,000
Quality control during commercial production
10,000
Patent filing and legal costs8,000
Payment for services in connection with R D activities
20,000
Testing of preproduction prototypes and models5,000
What amount should Northern report as research and development expense in its income statement?
1) $285,000
2) $273,000
3) $293,000
4) $260,000
5) $275,000

Answer 1

Northern Company should report $275,000 as research and development (R&D) expense in its income statement, which is the sum of salaries, depreciation on R&D equipment, payment for R&D services, and testing of prototypes.

Step-by-step explanation:

The Northern Company should report research and development expense in its income statement by adding up all R&D related expenditures. To calculate this, we include only the costs that are directly associated with the research and development phase. Therefore, the R&D expenses are Salaries ($200,000), Depreciation on R&D equipment ($50,000), Payment for services in connection with R&D activities ($20,000), and Testing of preproduction prototypes and models ($5,000). We do not include Quality control during commercial production ($10,000) as it is not considered an R&D expense but rather a production cost. Similarly, Patent filing and legal fees ($8,000) are not counted as they are considered legal and registration expenses. Adding up the relevant R&D costs we get $200,000 + $50,000 + $20,000 + $5,000 which equals $275,000.