Devolopment Costs on Balance Sheet

[SimonG]

Hello all,

I'm an Engineer learning about the world of Financial Management (and struggling right now!)

If an Engineering firm wants to fund product development on the next financial year, how is this reflected in the balance sheet?

For example, $2m is required. So if the company borrows this money on a long term loan, it has to be entered into the 'LTL' section on the balance sheet. How is this reflected on the left hand (Asset) side? Is the full amount entered into intangible assets, even though it's very hard to value the research?

What would happen to the balance sheet if cash was used to fund the research?

Thank you very much for any help,

Simon

 

[Ronika]

Hi Simon,

The initial entry for any long term loan is to debit cash for the amount received and credit the corresponding amount to loan payable which is a long term liability except for the current portion (due in one year).
When costs are incurred that relate to the development the entry would be to debit the intangible assets accounts and credit the cash, only for the outlays that are made that relate specifically to the development.
There are some other accounting issues that relate to capitalizing costs and how to depreciate them and/or expense. I would recommend speaking to an accountant about this.
Hope this helps.
Ronika Khanna
Montreal Financial