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msod1273
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Posted: 26 Apr 2012 at 13:01 \| IP Logged

The answer is D. What I understand is that cost incurred to develop computer software for internal use is expensed to R&D upto the preliminary project state. In this question the cost of $100,000 in not expensed to R&D so where is this cost expensed.

Brill Co. made the following expenditures during the current year:

Costs to develop computer software for use in Brill's general management information system $100,000

Costs of market research activities 75,000

What amount of these expenditures should Brill report in its current year income statement as research and development expenses under U.S. GAAP?

a. $175,000

b. $100,000

c. $75,000

d. $0

Explanation

Choice "d" is correct. Under U.S. GAAP, Research and development includes costs incurred prior to technological feasibility for developed software that is to be sold, leased, or marketed. This software is for internal use, unrelated to production and is not considered research and development. Market research is also not research and development because it is not aimed at discovery of new knowledge to develop a new product or service.

astone
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Posted: 26 Apr 2012 at 19:36 \| IP Logged

Costs for internally developed software are expensed in the preliminary project state. Costs are capitalized when they reach technological feasibility. Up to that point, they are expensed to an operating expense.

R&D costs are always expensed under GAAP unless assets have other uses. GAAP has very strict rules for classifying expenses as R&D. They have to represent planned efforts of a company to discover new information. There is not an option to capitalize these expenses but rather to classify them as R&D or Operating expenses.

A company with high R&D expenses may look like a good investment because they are investing in new discoveries, so the rules to classify expenses as R&D have been established to give shareholders and potential investors accurate information.

msod1273
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Posted: 26 Apr 2012 at 20:55 \| IP Logged

Astone,

Thanks for the reply and reinforcing the R&D rules. But for the posted question won't 100,000 be considered R&D expenses because the software is developed for internal use.

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