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Project Accounting for Research and Development

Question

Tirgaran Ltd has been involved in a project to develop an engine that runs on extracts from sugar cane.  It started the project in February 2010.  Between the starting date and 30 June 2010, the end of the reporting period for the company, Tirgaran Ltd spent $254,000 on the project.  At 30 June 2010, there was no indication that the project would be commercially feasible, although the company had made significant progress and was sufficiently sure of future success that it was prepared to outlay more funds on the project.
After spending a further $120,000 during July and August, the company had built a prototype that appeared to be successful.  The prototype was demonstrated to a number of engineering companies during September, and several of these companies expressed interest in the further development of the engine.  Convinced that it now had a product that it would be able to sell, Tirgaran Ltd spent a further $65,000 during October adjusting for the problems that the engineering firms had pointed out.  On 1 November, Tirgaran Ltd applied for a patent on the engine, incurring legal and administrative costs of $35,000.  The patent had an expected useful life of 5 years, but was renewable for a further 5 years upon application.

Between November and December 2010, Tirgaran Ltd spent an additional amount of $82,000 on engineering and consulting costs to develop the project such that the engine was at manufacturing stage.  This resulted in changes in the overall design of the engine, and costs of $5,000 were incurred to add minor changes to the patent authority.
On 1 January 2011, Tirgaran invited tenders for the manufacture of the engine for commercial sale.

Required:
Discuss how Tirgaran Ltd should account for these costs.  Provide journal entries with an explanation of why these are the appropriate entries.

Summary

The question belongs to Finance and it is about a company named Tirgaran Ltd. Tirgaran Ltd had undertaken a project and incurred expenses over 1 year of time. The company has to account the various expenses that had been incurred on the project in their annual account books. For this reason, the company has to undertake project accounting for this particular project. The rest of the details are given in the solution.

Total Word Count 237

 

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