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During the year ended 31 December 20X4, Bloop Co incurred expenditure on two projects
Project 1 costs relate to the evaluation of alternatives for improved production systems to be
implemented during 20X5 and 20X6. The company spent $1m on related salaries and materials
and $2m on design equipment (which had an expected life of four years).
Project 2 involves the testing of a new product which will be introduced to the market in 20X5 and
is expected to generate profits over a four-year period. The company spent $4m on salaries and
The policy is to charge a full year’s depreciation on assets.
What is the TOTAL charge to profit or loss for the year ended 31 December 20X4?
The answer is 1.5 mil (1+ 2/4)
My question is why have they capitalized the design equipment and depreciated it (2/4) isn’t it research expenditure too and should fully expensed to p/l?
The $2m expenditure is on equipment that is used in the development of the intangible asset and so capitalise and depreciated. The depreciation is then expensed through profit or loss.