Question Mark Ltd has an income tax rate of 30%. The company makes it a practice to capitalise a portion of its research and development costs as a ‘deferred asset’ and to amortise them at 20% p.a. The accountant has suggested to the financial controller that the policy of capitalising research and development should be discontinued because the economic benefit of the expenditure is not clearly determinable. The amount of research and development capitalised this year was $180 000. What effect would such policy change have on the following?
-Assets:

Question

Quizplus · Accepted Answer

If the policy of capitalising research and development costs is discontinued, the deferred asset of $180,000 will need to be written off immediately, reducing assets. The amount by which the assets are reduced will be the total capitalized R&D cost, which is $180,000, less the portion of the asset amortized in the current year, which is $36,000 (20% x $180,000). Therefore, the assets will be reduced by $144,000 ($180,000 - $36,000).

Question Mark Ltd Has an Income Tax Rate of 30