 Hello and welcome to this session in which we would look at an exercise that deals with research and development cost or research and development expense. How do we compute research and development costs? What are the rules? So you need to know whether an item is expense as research and development or if it's not an expense. Remember every time we spend money, every time the company incur an expenditure, we have to determine whether this expenditure is an expense or an asset. Simply put, are we going to expense the item or are we going to capitalize it? Capitalizing means treating it as an asset. Now for research and development costs, it's pretty straightforward. We basically, the general rule is we basically expense practically everything. Yes, practically everything, but we have to be careful because we always have those special rules when it comes to accounting, things that we need to be aware of before we expense. So this exercise will help you determine, illustrate the concept or you have to be very careful in placing this item as an expense or as an asset. Now if you're watching most likely you are a student or a CPA candidate, either or you're welcome. Thank you that you are watching. But what I suggest you do is to go to farhatlectures.com for additional resources, multiple choice through false. I don't replace your CPA review course. I can help you do better. I can help you do better in your courses. Please check out my website. For the first item, we purchased a piece of equipment. The cost of the equipment is 300,000. However, the equipment will have alternative uses in future R&D project over the next five years. We are using the straight line and we purchased the equipment January 1st. Now generally speaking, when you hear the word research and development and equipment, although it's a piece of equipment, a copy or a printer, a laboratory, if it's for R&D we expense. So you would say okay, what should we do now? You have to be very careful. In this example, the equipment will have alternative uses in research and development. What does that mean? It means this piece of equipment is not solely devoted for this project. It means we have to split the cost for this project as well as other projects. So how do we do so? Well, through depreciation, we're going to have a 300,000 dollar piece of equipment. We're going to depreciate it over five years, five years, not six. And every year we are going to take depreciation expense of 60,000. Now we debit depreciation expense, credit accumulated depreciation. Then what we do for 60K and 60K. I'm just going to show you what happened. Then we're going to debit R&D expense and credit depreciation expense. Simply put, take it out of the expense, take it out of the depreciation expense and put it into R&D expense. Okay, so take it out of depreciation expense and put it into R&D. So we have to be careful. If the asset has alternative use, be careful. And this is how they will try to trick you on the CPA exam. Material consumed an R&D project. Well, again, as I said, every time you hear the word R&D, you would say it's an expense. So it's an expense. So we're starting with 60,000 of depreciation plus 61,000 of material consumed consulting fees paid to outsider for R&D project. Now you might be saying, hold on, but this is not, we're not paying our employees, we're paying outsiders. Nevertheless, it's an R&D, it's expense 102. Personnel cost of persons involved in R&D project. Of course, we are going to expense this as R&D 134. So whether it's whether we are paying our our own employees, our own personnel or paying an outsider as long as those expenditure are related to the R&D project, then it is R&D. Indirect cost reasonably allocated to R&D. Well, now these costs are not direct, but they're like indirect. Maybe the cost of a janitor security, other costs that partially support the process. Well, if it's reasonably allocated, then it's R&D plus 54,000. Material purchase for future R&D project, 34,000. Just be careful here. The material purchase is not consumed as of yet. It's for future R&D project. Simply put, this is basically a form of prepaid. Why? Think about it. We can change our mind. Maybe we will scrap the future project. Maybe we will return those items. Maybe we'll use them for something else other than the R&D project. Well, what we have to do, we have to wait because we just purchased them. We did not use them yet. Once we use them in the R&D project, we will expense them. So, those are the expenditure for R&D. If my math is right, the total R&D should be 411,000. What should you do now? Once again, I'm going to invite you to go to farhatlectures.com, work MCQs, multiple choice through false questions that's going to help you do better in your course on the CPA exam. Invest in yourself and invest in your career. Don't shortchange yourself. Good luck, study hard, and of course, stay safe.