Question

Consider the following scenarios:

Scenario 1: In the current year, a kitchen appliance manufacturer spends $450,000 on R&D costs to develop internally a new heating element for conventional ovens. By the end of the year, the design for the new heating element has been patented. Legal and filing fees associated with the patent are $50,000. The patent has a fair value $600,000 and an estimated useful life of 10 years.
Scenario 2: In the current year, a kitchen appliance manufacturer purchases a patent for heating elements used in conventional ovens from a third-party for $600,000. The patent has an estimated useful life of 10 years.

Under which scenario would the company report greater research and development expense in the current year?

Multiple Choice

Scenario 1.

Scenario 2.

The expense would be the same under each scenario.

An expense is not recorded under either scenario.

Answer 1

Scenario 1.

Step-by-step explanation:

According to the scenario, computation of the given data are as follow:-

Patent:- Patent is a intellectual property that gives the right to its owner to making, using and selling the invention and transfer that right to others too. Patent has their legal life.

Research and development cost:- Research and development cost is an intangible assets which incurred by company.

1st Scenario:- Manufacturer spends $450,000 on research and development cost. It is an expenses. It will not the cost of oven.

2nd Scenario:- Because patent purchased by the third party so no research & development cost incurred on the patent.

According to the analysis when we compared scenario 1 and scenario 2, company will report high research and development expenses in Scenario 1.