The research and development (R&D) team at a pharmaceutical company is developing a drug for colon cancer. Which of the following is true of the R&D costs incurred in developing this drug during the current year?Multiple ChoiceThey are expensed in the period in which benefits from R&D accrue.They are treated in the same manner as intangible assets that are purchased.They are recorded as an intangible asset in the balance sheet.They are expensed directly in the income statement.
Question
The research and development (R&D) team at a pharmaceutical company is developing a drug for colon cancer. Which of the following is true of the R&D costs incurred in developing this drug during the current year?Multiple ChoiceThey are expensed in the period in which benefits from R&D accrue.They are treated in the same manner as intangible assets that are purchased.They are recorded as an intangible asset in the balance sheet.They are expensed directly in the income statement.
Solution
The correct answer is: They are expensed directly in the income statement.
Here's why:
Research and Development (R&D) costs are considered period costs and are expensed in the period in which they are incurred. This is because the future benefits of R&D are uncertain, and therefore, these costs are not capitalized. Instead, they are treated as expenses that are deducted from revenue in the income statement. This is in accordance with the generally accepted accounting principles (GAAP).
So, even though the R&D costs might lead to a successful drug in the future, the company still needs to record these costs as an expense in the current period's income statement.
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