CBC Biomedical Undertook a Research and Development Project in 2016

question 27

Essay

CBC Biomedical undertook a research and development project in 2016.As of March 1 of that year,management concluded that the project had met the requirements for the capitalization of development costs.For the remainder of 2016 and 2017,the company capitalized $4.3 million of development costs for the project.Capitalizing these costs helped CBC Biomedical to remain profitable; had these costs been expensed,the company would report losses.In 2018,CBC Biomedical began amortizing the development cost over the estimated useful life of 10 years,beginning with a full year of amortization in 2018.
In 2021,in preparation for an initial public offering (IPO),the company engaged a public accounting firm to conduct an external audit of its financial statements.The auditors concluded that the development cost did not meet the criteria for capitalization.Specifically,it is their opinion that CBC Biomedical,at the time,did not demonstrate that the company had sufficient financial resources to complete the development project due to the recurring operating losses incurred.After some heated debate,CBC Biomedical management agreed with the auditors' position in order to obtain an unqualified audit opinion.The company had not yet recorded any amortization for 2021 when it agreed to correct the error.The company's tax rate is 30%.
Required:
Record the journal entries necessary to correct CBC's accounts.Include the effect of income taxes.

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Definitions:

Excess Capacity

The situation in which a firm produces less than its potential output, often indicated by idle resources or facilities.

Potential Entrant

Refers to a business or company that is not currently in a market but has the capability and interest to enter the market if certain conditions are met.

Dominant Strategy

A strategy in game theory that yields the best outcome for a player regardless of what strategies other players choose.

Nash Equilibria

A situation in a non-cooperative game where no player can benefit by changing strategies, assuming the other players also don't change their strategies.