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As 26 query

lucky (article) (65 Points)

03 March 2015

On January 1, 2010, NDA purchased equipment for use in developing a new product. NDA uses the Straightline Depreciation Method. The equipment could provide benefits over a 10 year period. However, the new product development is expected to take 5 years, and the equipment can be used only for this project. How much cost of the equipment should be charged to profit anid loss account for 2010 (a) The total cost of equipment. (b) One-fifth of the cost of equipment (c) One-tenth of the cost of equipment(d)- zero answer given in book is (a) plz can someone explain in details ..

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Max Payne (employed) (2574 Points)
Replied 04 March 2015

AS-26 deals with Research cost and Development costs

Research = PLANNED investigation for gaining knowledge.

Development = APPLICATION of knowledge gained by research

Internally generated intangible asset can be recognized if it satisfies the following conditions:-

Technical feasibility of completion of intangible asset should be demonstrated by an enterprise.

An enterprise has to show its intention to complete the intangible asset.

There should be availability of adequate resources (in all respect - financial and other factors of production) to complete the intangible asset.

The enterprise should provide detail about probable future economic benefits. It has to demonstrate the existence of market for the output to be generated with the help of that intangible asset or internal use of that intangible asset.

If all the above conditions are satisfied then the development cost is capitalized in the book of accounts. Else, it has to be expensed.

In this case, the company will incur the expense for the equipment today. This equipment will be used for development to be completed 5 years later. The benefit of the development expense will be from 6th year to 15th year. But at this point there is no indication of satsifying all the recognition criteria. So it should be expensed.

From an exam point of view, write the recognition criteria. Write your assumption regarding satisfying the criteria. Whoever corrects your paper, put the ball in his court.