Question Tag: R&D capitalization

At the last Annual General Meeting of OJB Ltd. the shareholders were unhappy about the delay in submitting the audited accounts to them for study before the meeting. Management of OJB Ltd attributed the delay in finalizing the accounts to the time spent by the External Auditors in auditing the accounts. It has been discovered that the delay in presenting the accounts for audit is because the Accounts Officer was not sure of the treatment of the following transactions in the financial statements of OJB Ltd. for the year ended 31st December 2016.

1. Stocks of raw materials and finished goods in the company’s warehouse have the following details: GH¢000 Stocks of finished goods Direct cost 50,000 Proportion of fixed overhead 10,000 Proportion of selling expenses 5,000 Net Realizable Value 62,000
2. A customer who owed OJB Ltd. an amount of GH¢25,000,000 lost all his business assets through a fire outbreak. OJB Ltd. had not taken an insurance cover over receivables.
3. Research and Development expenditure capitalized during the year amounted to GH¢100,000,000. On further examination, it was noted that an amount of GH¢25,000,000 relating to market research was included in the Research and Development cost capitalized.
4. The company entered into a non-cancellable lease which covered the useful life of the asset. At the inception of the lease, the fair value of the asset was GH¢45,000,000 and was equal to the present value of the minimum lease rentals. The lessee was responsible for both insurance and maintenance of the lease asset. The accounts officer has included only the annual lease rentals of GH¢9,000,000 as a charge in the Statement of Profit and Loss.

You are required to:

Present a report that details out the treatment of the above transactions in accordance with appropriate accounting standards. (20 marks)