Question

The Wisconsin Corporation spends $100,000 in research and $200,000 in development during year one. The company spends the same amounts in year two. For its internal reporting, the company has a policy whereby all research costs are expensed as incurred, but all development costs are capitalized. These capitalized costs are then amortized to expense over five full years beginning with the year after the cost is incurred. What change is necessary to reduce the internally reported net income figure for year one to the amount that should be shown for external reporting purposes according to U.S. GAAP?

a) Expense a portion of the development costs in year one.
b) Capitalize a portion of the research costs in year one.
c) Extend the amortization period for the capitalized development costs.
d) Capitalize all research costs and expense them over five years.
e) No change is necessary; the treatment is consistent with U.S. GAAP.

Answer 1

To reduce the internally reported net income figure for year one to the amount that should be shown for external reporting purposes according to U.S. GAAP, the company needs to b)capitalize a portion of the research costs in year one.

Step-by-step explanation:

To reduce the internally reported net income figure for year one to the amount that should be shown for external reporting purposes according to U.S. GAAP, the company needs to capitalize a portion of the research costs in year one. According to U.S. GAAP, research costs should be expensed as incurred, while development costs should be capitalized. By capitalizing a portion of the research costs in year one, the company can spread the expense over multiple years, which will reduce the net income figure for year one.