Research vs Development Costs

Example 1:

A firm spent ₹80,000 on research (early stage) and ₹70,000 on development (which meets criteria for capitalization) for a new product. How are these accounted for?

Solution :

1. Research cost = expense immediately (no intangible).

2. Development cost (if it meets specific criteria: technical feasibility, probable future economic benefits, etc.) = intangible asset.

Entry:

(1) R&D Expense A/c Dr. 80,000

To Cash/Bank A/c 80,000

(Being research cost expensed)

(2) Development Intangible A/c Dr. 70,000

To Cash/Bank A/c 70,000

(Being development cost capitalized)

Hinglish Explanation:

Research phase cost kabhi capitalise nahi karte, direct expense hota hai. Development phase (if criteria met) intangible asset banta hai.

Subsequent Expenditure on Software Upgrade

Example 2:

A software initially recognized at ₹1,20,000. Next year, ₹30,000 spent on upgrades to enhance its capacity significantly. Should we capitalize or expense?

Solution :

If the upgrade significantly extends the software’s life or capacity, we capitalize that cost. Otherwise, we expense.
Assume it significantly extends capacity => capitalize.

Entry:

Software A/c Dr. 30,000

To Cash/Bank A/c 30,000

(Being software upgrade capitalized)

Hinglish Explanation:

Agar upgrade me major enhancement hai, hum intangible asset ki carrying value badha dete hain. Minor maintenance hota to expense kar dete.

Disposal of Patent

Example 3:

A patent with carrying value ₹40,000 is sold for ₹45,000. Show the disposal entry and profit calculation.

Solution :

1. CV = 40k, sale = 45k => profit of 5k.

Entry :

Particulars	Debit (₹)	Credit (₹)
Bank A/c Dr.	45,000
Patent A/c	?	?
Profit on Sale of Patent A/c	?	?

We do:

Bank A/c Dr. 45,000

To Patent A/c 40,000

To Profit on Patent Disposal 5,000

Hinglish Explanation:

Humne 45k me becha, book me 40k tha => 5k ka profit. Patent ko credit karte hain 40k, profit 5k.

Licensing Agreement with Revenue-based Amortisation

Example 4:

A licensing agreement costs ₹1,00,000, with an expected total revenue of ₹5,00,000 from the licensed product. In Year 1, revenue is ₹1,50,000. Use the revenue-based amortisation approach. Compute Year 1 amortisation.

Solution :

Ratio = 1,50,000 / 5,00,000 = 30% of total benefit used in Y1.
So amortisation = 30% of 1,00,000 = ₹30,000.

Table:

Year	Revenue	% of total	Amortisation
1	1,50,000	1.5/5.0 = 30%	1,00,000 × 30% = 30,000
...	...	...	...

Hinglish Explanation:

Agar intangible ka consumption revenue se measure ho, to proportionate ratio se amort karte hain.

Franchises Cost

Example 5:

Paid ₹2,00,000 for a franchise with a contractual life of 8 years. No salvage. Show the annual straight-line amortisation.

Solution :

2,00,000 / 8 = ₹25,000 each year.

Table (Amortisation schedule):

Year	Opening	Amort (₹)	Closing
1	2,00,000	25,000	1,75,000
2	1,75,000	25,000	1,50,000
…	…	…	…
8	25,000	25,000	0

Hinglish Explanation:

Franchise intangible par aap direct 25k amort karte ho har saal over 8 years.

Reassessing Indefinite Life to Finite

Example 6:

A brand carried at ₹4,00,000 was indefinite life. Now the management decides it has a 5-year useful life. Show amortisation from this point onward.

Solution :

If indefinite intangible becomes finite, then we start amortisation.
CV = 4,00,000. Life 5 => 80,000/yr from now.

Entry each year end:

Amortisation Exp. A/c Dr. 80,000

To Brand A/c 80,000

(Being brand now amortized with 5-year life)

Hinglish Explanation:

Pehle indefinite me no amort. Ab life set to 5 yrs => 4L / 5 = 80k/yr.

Partial-Year Amortisation for Software

Example 7:

Software bought on 1st Oct for ₹1,80,000, life 3 years. The year ends 31st Mar. Find amortisation for the first year (6 months).

Solution :

Full-year = 1,80,000 / 3 = 60,000.
6 months usage => 60,000 × (6/12) = ₹30,000.

Table:

Particulars	Calculation	Amount (₹)
Annual Amortisation	1,80,000 / 3	60,000
For 6 months (1st Oct to 31st Mar)	60,000 × 6/12	30,000

Hinglish Explanation:

Bas partial year proration. 6 mahine half hi charge karte hain.

Residual Value in Intangible

Example 8:

A license (intangible) is purchased for ₹2,00,000 with residual value ₹20,000 after 5 years. Compute SLM amortisation yearly.

Solution (Hinglish):

Depreciable = 2,00,000 – 20,000 = 1,80,000.
Over 5 years => 36,000/yr.

Table:

Year	Opening	Amort (₹)	Closing
1	2,00,000	36,000	1,64,000
2	1,64,000	36,000	1,28,000
…	…	…	…
5	56,000	36,000	20,000 (resid)

Hinglish Explanation:

Kabhi kabhi intangible ke residual value ho sakta hai (active market or commitment). Toh hum cost minus salvage karke amortise.

License Impaired Mid-Way

Example 9:

A 5-year license with cost ₹1,50,000 is amortised @30k/yr. After 2 yrs, CV = 90k. Then an impairment review shows it’s worth only 50k. Show the impairment and new amortisation if 3 yrs remain.

Solution :

1. 2 yrs done => 60k total, 90k left.

2. Impair to 50k => 40k impairment loss.

3. 3 yrs remain => new amort = 50k ÷ 3 = ~16,667/yr.

Entry:

Impairment Loss A/c Dr. 40,000

To License A/c 40,000

Then from next year, 50k / 3 = 16,667 annual.

Hinglish Explanation:

Hum 90k se 50k par le aate hain (40k impairment). Baad me 3 saal me 50k amort.

Assignment (Transfer) of Patent

Example 10:

A patent with carrying value ₹80,000 is assigned (transferred) to another entity for ₹70,000. Show the disposal entry and resulting gain/loss.

Solution :

CV = 80k, sale price = 70k => Loss of 10k.

Entry:

Bank A/c Dr. 70,000

Loss on Patent Transfer A/c Dr. 10,000

To Patent A/c 80,000

Hinglish Explanation:

80k par rakha hua tha, 70k me transfer hua => 10k ka nuksan.

Hinglish Recap

1. Purchase of intangible → “Intangible Asset A/c Dr., To Bank/Cash.”

2. Amortisation for finite life intangible → (Cost – salvage)/life. Indefinite intangible → no amort, do impairment test annually.

3. Impairment: reduce carrying if intangible’s recoverable < carrying.

4. Research cost → expense, Development cost (if criteria met) → intangible.

5. Revaluation model for intangible is possible but rare. Gains → revaluation surplus.

6. Partial year → pro-rata.

7. Residual value in intangible is often 0 unless active market or commitment.