Question

Say the company spent $500000 in developing the prototype of the Lawn Robot. How should Matt and Christ treat this item in their report? explain.

Answer 1

As per GAAP, the amount spent in developing the prototype would be considered research and development expenses. This should be treated as expense rather than being capitalized in the normal Income statement.

However if the development of the prototype is with regard to capital decision making, the same should be treated as a sunk cost. This is because the amount spent is already forgone and will not impact the future cash flows. So it will not have any impact on decision making and will be disregarded for capital budgeting.