Discussion Questions
Question 1
It is an issue concerning about R&D costs.
FASB ASC 730-10-20 demonstrates the definition of research and development.
FASB ASC 730-10-05 stipulates general accounting arrangement to R&D cost. In general, most R&D costs are expensed in the periods incurred, because (1) R&D costs entail a high degree of uncertainty regarding the amount and timing of future benefits, and (2) R&D costs are difficult to match with future revenues due to a lack of direct relationship between R&D costs and future revenues.

To determine the treatment of following costs incurred in 2013:
a. Salaries of administrative personnel
According to ASC 730-10-25-2(b), personnel salaries engaged in R&D activities shall be included in R&D costs. Based on ASC 730-10-25-2(e), a reasonable allocation of indirect costs also shall be included in R&D costs. However, general and administrative costs that are not clearly related to R&D activities shall not be included as R&D costs. According to ASC 730-10-15-4(c), the acquisition, development, or improvement of a process by an entity for use in its selling or administrative activities shall not be considered R&D costs, because such process may be intended to achieve cost reductions as opposed to revenue generation.
Therefore, the salaries of administrative personnel shall be considered R&D costs and expensed in the periods incurred if they are directly or indirectly related R&D activities. Otherwise they shall not be included as R&D costs.
b. Market research costs
According to 730-10-15-4(e), market research or market testing activities shall not be included in R&D costs because those activities are related to the selling function of an entity. Thus market research costs are not regarded as R&D costs. Such costs are expensed in the periods incurred.
c. Equipment purchases
The 200,000 equipment that was built specifically for developing the design of the new product should be expensed as R&D. According to ASC 730-10-25-2(a), equipment whose sole use is for a particular research and development project and that has no alternative future uses is considered R&D costs and expensed at the time the costs are incurred. ASC 730-10-55-1 stipulates that the costs contributed to the design of possible product are considered R&D costs.
The 300,000 equipment that was used to manufacture the preproduction prototypes and will be used to manufacture the new product in upcoming commercial production shall be capitalized and depreciated, because it can generate certain future benefits. According to ASC 730-10-25-2(a), the costs of equipment that is acquired for research and development activities and that has alternative future uses shall be capitalized as tangible assets when acquired. The depreciation of such equipment used in those activities is considered research and development costs.

Question 2
1. The FASB ASC 470–40–05–2 provides the guidance for determining whether an arrangement involving the sale of inventory is “in substance” a financing arrangement. The Peterson’s plan is a financing arrangement because it satisfies one of the conditions described in 470–40–05–2: Jershey Company sells product to another entity (Windy City, from which Jershey could obtain the financing), and in a related transaction agrees to repurchase the product in the future.

2. The FASB ASC 470–40–25 provides the guidance regarding the recognition of a product financing arrangement. The ASC 470–40–25-1 stipulates that a product financing arrangement shall be accounted for as a borrowing rather than as a sale. The sponsor is in substance the owner of the product and the sponsor shall, therefore, report the product as an asset and the related obligation as a liability.

3. As Jershey Company sells product for the purpose of financing and in a related transaction agrees to repurchase the product, according to ASC 470–40–25-2(a), Jershey Company shall record a liability at the time the proceeds are received from the Windy City to the extent that the product is covered by the financing arrangement. The sponsor, Jershey, shall not record the transaction as a sale and shall not remove the covered product from its balance sheet. According to ASC 470–40–25-3, the cost of the repurchase amount in excess of the originally purchase costs represents financing and holding costs. The sponsor, Jershey, shall account for these costs in accordance with its accounting policies applicable to other financing and holding costs.

4. a. Journal entry to record the “sale”
Cash 160,000 Liability – product financing arrangement 160,000

b. Journal entry to record the repurchase
Liability – product financing arrangement 160,000
Holding and financing costs 4,000 Cash 164,000