Clonal, Inc., a biotechnology company, developed and patented a diagnostic product called Trouver. Clonal purchased some research equipment to be used exclusively for Trouver and other research equipment to be used on Trouver and subsequent research projects. Clonal defeated a legal challenge to its Trouver patent and began production and marketing operations for the product.
Clonal allocated its corporate headquarters’ costs to its research division as a percentage of the division’s salaries.
1. Explain how Clonal should report the equipment purchased for Trouver in its income statements and balance sheets.
2. a. Describe the matching principle.
b. Describe the accounting treatment of research and development costs and consider whether this is consistent with the matching principle. What is the justification for the accounting treatment of research and development costs?
3. Explain how Clonal should classify its corporate headquarters’ costs allocated to the research division in its income statement.
4. Explain how Clonal should report the legal costs incurred in defending Trouver’s patent in its statement of cash flows.