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To finance this Research & Development activity, a company incurred a total budget of Rs. 1.0 million. Following costs were incurred by the company in pursuance of its research and development:
Rs 200,000 were paid to the researchers engaged in the research process. Whereas, administration cost incurred to supervise this phase was Rs. 100,000. Material of Rs. 400,000 was purchased for developing the prototype. First model was tested at a cost of Rs. 150,000 to ensure that it operates properly according to the customer’s demand. Meeting was called and expert engineers were invited for introduction of new product. Total cost incurred for this purpose was Rs. 75, 000. A prototype was tested in the controlled environment to check customers’ acceptance for the design at a cost of Rs. 150,000. Sample was proved to be acceptable by customers.

1.   Determine research cost incurred on the project.   
2.   Determine development cost associated with the project.                                    
3.   Which cost needs to be capitalized as per IAS 38?                                           
4.   Give arguments in support of your answer in 3 above in the light of IAS 38.
in IAS 38 - Intangible Assets by
edited by
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1 Answer

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I would answer as follows:
1. Research costs = 200,000+100,000 = 300,000
2. Development costs = 400,000+150,000+150,000 = 700,000
3. You can capitalize only development costs ie. 700,000
4.  As per IAS 38.54, you need to charge all research cost to expense. Costs of introduction of the product to experts do not relate to either research or development costs in my opinion.
by Level 2 Member (4.2k points)