Question 2 OR (f)
Deferred R&D expenditure amortisation
3 marks
- Time to write
- About 6 minutes
- Notes
- Crux notes
Question
Question 2 OR (f) · 3 marksA company had deferred research and development cost of ₹240 lakh. The sales it expects in the years that follow are as under:
| Years | Sales (₹ in lakh) |
|---|---|
| 1 | 480 |
| 2 | 360 |
| 3 | 240 |
| 4 | 120 |
Suggest how the Research and Development cost should be charged to the Profit and Loss Account.
If it is felt, when the 3rd year ends, that the 4th year will bring no further benefit, how would the unamortized expenditure be dealt with in the Company's accounts?
Reworded from the university paper: names and figures differ, the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.
Before you write
Read off the question and its marks
Read from the question
- Suggest…Is…?2 asks, each with its own marks below. Answer both.
What the paper leaves open
The paper leaves the basis of the charge open; the answer charges the cost in proportion to the expected sales, the basis the figures given point to.
Write it in this order
- 1 R&D as deferred revenue expenditure; amortise over benefit sales 2 marks 4 min
- 2 Write off the unamortised lakh when benefit ceases 1 mark 2 min
Try it first. About 6 minutes for 3 marks. Write it out, then open the solution.
Solution
Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.
Nature. A large expenditure of a revenue nature whose benefit is available for more than one year: such as expenditure on research and development: is treated as deferred revenue expenditure and written off over the years that benefit from it.
Amortisation in proportion to the benefit (expected sales). The charge should follow the pattern in which the benefits are used up, with straight line only where that pattern cannot be measured reliably. Here the expected sales measure the benefit. Total expected sales = 480 + 360 + 240 + 120 = ₹1,200 lakh, so the ₹240 lakh is charged in the ratio of each year's sales:
| Year | Expected sales (₹ lakh) | Charge to P&L (₹ lakh) |
|---|---|---|
| 1 | 480 | 240 × 480/1200 = 96 |
| 2 | 360 | 240 × 360/1200 = 72 |
| 3 | 240 | 240 × 240/1200 = 48 |
| 4 | 120 | 240 × 120/1200 = 24 |
| 1,200 | 240 |
If no further benefit after Year 3. By the end of Year 3, ₹96 + ₹72 + ₹48 = ₹216 lakh has been written off, leaving an unamortised balance of ₹24 lakh. An asset is eliminated from the balance sheet when no future economic benefits are expected from it, so the whole remaining ₹24 lakh is written off to the Profit & Loss Account in Year 3 (making the Year-3 charge ₹48 + ₹24 = ₹72 lakh); nothing is carried forward.
Where the 3 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | R&D as deferred revenue expenditure; amortise over benefit (sales) | 2 |
| 2 | Write off the unamortised ₹24 lakh when benefit ceases | 1 |
| Total | 3 |
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