Question

Madsen Pharmaceuticals has spent 15 years developing a new medication for epileptic seizures. They finally have a new FDA-approved drug and have applied for a patent. When you look at Madsen’s accounting books, what would you expect to find?

• A : The research and development costs for the new drug would have been expensed in one lump sum at the end of the project when total costs were determined.

• B : The research and development costs for the new drug would have been expensed throughout the past 15 years as money was spent on the project.

• C : The research and development costs for the new drug would have been capitalized throughout the past 15 years as money was spent on the project.

• D :The research and development costs for the new drug would have been capitalized at the beginning of the project and amortized as money was used.

Answer 1

I will expect from the books of Madsen pharmaceuticals that (Option C) The research and development costs for the new drug would have been capitalized throughout the past 15 years as money was spent on the project. And the same should be amortized over a certain period as is agreed by the governing body and which will also be in compliance of various accounting standards and principles.

Option-a, says that expend all the expense lumpsum after the drug is formulated which is wrong because the benefit of such formula will be more than just one year.

Option-b is also wrong because as per the GAAP'S and IFRS the research and development costs should be capitalised and not expended as and when incurred.

Option-d don't have a proper logic, how can one capitalise the cost even before the cost is incurred by the company.