DEPARTMENT OF ACCOUNTING AND FINANCE

Company «W, SA» operates in the pharmaceutical industry. Currently, it is developing three
R&D projects aimed at obtaining a new vaccine against a type of flu that is expected to
spread in the following months. During the year X9, the company carries out the following
transactions:

1. In the first project, the payments made on the 1st of February, which are related to the
research phase, are as follows:
- Utilities ............................................................. €5,000
- Raw materials purchased .............................. €4,800

2. The second project, which is also in the research phase, is being carried out by an
important research institute. On the 15th February, this institute sends an invoice for
€8,500, to be paid in 90 days.

3. The third project is in the development phase. The payments directly related to this
project, which are accounted for on the 15th March, are as follows:
- Raw materials purchased ............................ €12,800
- Salaries and wages ......................................... €9,200

4. On the 31st March, the company buys a patent in cash, through an advisory and
consultancy company. The acquisition cost amounts to €100,000. In addition, the
company pays a fee of €600 in cash for the services of the consulting company. The
estimated useful life of the patent is 4 years.

5. On the 1st of April the company buys a small pharmaceutical laboratory that is already in
operation for €60,000 (this transaction is exempt from VAT). On that date, the fair value
of the identifiable assets and liabilities acquired is as follows:
- Buildings ........................................................ €36,000
- Trade receivables ............................................ €7,500
- Finished goods .............................................. €13,000
- Suppliers .......................................................... €8,500

6. On the 31st August the company buys a registered trademark for €12,000 paid in cash.
The acquired trademark gives the company a strong image of quality that is expected to
have positive impact on future economic benefits indefinitely; so the useful life of this
trademark cannot be estimated reliably.

7. On the 1st of October, the company buys a governmental license to supply a series of
products exclusively during a period of seven years, paying €14,000 in cash (this
transaction is exempt from VAT).

8. On the 1st of November, the company decides to sell a machine bought on the 1st of
January X4 for €18,000, and the conditions for classification as non-current asset held for
sale are met. The useful life of the machine was estimated at 10 years, applying the
straight-line method of depreciation. On the date that the machine is offered for sale, its
fair value is €7,000 and the estimated costs of selling it are €1,400.

9. On 31st December, because of a reorientation of the business model, the company sells
the patent bought previously for €120,000.

Practical Exercises - 1-
Financial Accounting II
 DEPARTMENT OF ACCOUNTING AND FINANCE

Data for accounting adjustments:

1. The management confirms the failure of the first R&D project, so the company decides to
abandon it at the end of the period.

2. The management positively evaluates the feasibility of the second R&D project, which is
still in the research phase, so the company decides to capitalise the related expenses.

3. The third R&D project, in the development phase and close to completion, also meets the
conditions for capitalisation. Research expenses related to this project were not
capitalised in previous years.

4. The company depreciates property, plant and equipment on the straight-line basis over 5
years, with the exception of buildings whose expected useful life is 20 years. Intangible
assets are amortised as indicated above.

5. In spite of the good prospects in connection with the acquisition of the trademark, at the
end of the year its recoverable amount only amounts to €9,000.

6. The company confirms that the demand for the products sold by the pharmaceutical
laboratory it bought has gone down significantly, so the recoverable amount of this
laboratory is estimated at €56,000. The Company considers that the pharmaceutical
laboratory it bought is a cash-generating unit.

7. On 31st December, the fair value less costs to sell of the machine classified as non-current
asset held for sale is €5,000.

Transactions in the first six months of the year X10:

1. On 31st of March, the third R&D project ends successfully. The payments directly related
to this project, which are accounted for on that date, are as follows:
- Raw materials purchased ............................ €10,800
- Salaries and wages ......................................... €2,400
- Utilities ............................................................. €5,300

2. On the 30th June, the company registers the vaccine in the Industrial Property Registry.
Registration costs amount to €400 (exempt from VAT). All the paperwork is carried out
by a consultancy company that charges €100 for its services. All the payments are in cash.

Work to do:
a) Accounting entries for the year X9
b) Adjustment accounting entries on 31-12-X9
c) Accounting entries for the first six months of the year X10

Practical Exercises - 2-
Financial Accounting II