A company spends $50,000 this year in research and development for a new drug to cure liver damage. By the end of the year, management feels confident that the new drug will gain FDA approval and lead to higher future sales. What impact will the $50,000 spending have on this year's financial statements?

Question

Luciana Baldwin

Business

30 September, 17:21

A company spends $50,000 this year in research and development for a new drug to cure liver damage. By the end of the year, management feels confident that the new drug will gain FDA approval and lead to higher future sales. What impact will the $50,000 spending have on this year's financial statements?

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Answers (1)

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Caroline Howell · Answer 1

increase expenses and decrease net income

Explanation:

Research and development costs must be treated as normal operating expenses and they must be included in the income statement. They are treated similarly to other operating expenses.

US GAAP requires R&D to be treated as expenses simply because the future value of R&D is very hard to determine, so they cannot be capitalized (and amortized).