Forfar plc is an innovative engineering company with a substantial research and development…

Forfar plc is an innovative engineering company with a substantial research and development budget. It is company policy to capitalise all expenditure relevant to development work wherever possible and the following projects were in progress at the year end, 30 November 1998:

Project A100

The company incurred costs of £200 000 in the year ended 30 November 1998 to exploit research into the production of engineering equipment with reduced energy requirements. The company has produced a prototype model but commercial production is not expected for several years.

No other feasibility studies have been carried out. The company also incurred expenditure of £100 000 on computer equipment to assist in testing and analysis and this is expected to have a useful economic life of five years.

Project A401

The company incurred technical research costs of £50 000 in November 1998 on behalf of a customer who commissioned Forfar plc to investigate the feasibility of high-energy battery cells. Forfar plc expects to recover the costs incurred plus a mark-up of 20% from their customer for this work. Market research costs of £20 000 have also been incurred by Forfar plc in November 1998 but these will be reimbursed at cost by the customer and an invoice was raised for this in December 1998. None of the technical research work has yet been invoiced though the project is successful and the work will be completed by January 1999.

Project C900

The company had capitalised development expenditure of £500 000 by 30 November 1997 on this project and incurred a further £70 000 during the year ended 30 November 1998. Commercial production of the new product started on 1 June 1998 and the company anticipates sales as follows:

The company expects competitors will move into this market by 30 November 2002 and the product will no longer be profitable after that date.

In addition to the above costs, the company spent £150 000 on plant in December 1995 to assist with this project and has been depreciating this over five years to date. The plant has no further use once the product is developed.

Project G150

The company’s technical director considers that there is the possibility of producing new generation computer-controlled engineering equipment. £400 000 was spent in the year ended 30 November 1998 to investigate the likelihood of a viable research project. In addition, technical staff costs on this project amounted to £55 000 in the year.

Project B105

This project was started in December 1994 to develop a new generation solar power panel. Costs capitalised to 30 November 1997 amounted to £550 000. Market research carried out in July 1998 at a cost of £25 000 indicated demand would reach 5000 panels per annum; the company’s finance director has calculated 7500 panels per annum would need to be sold in order to break even.

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