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22 November, 03:21

Early in 2016, the Excalibur Company began developing a new software package to be marketed.

The project was completed in December 2016 at a cost of $6 million. Of this amount, $4 million was spent before technological feasibility was established.

Excalibur expects a useful life of five years for the new product with total revenues of $10 million.

During 2017, revenue of $3 million was recognized.

1. Prepare a journal entry to record the 2016 development costs.

Event General Journal Debit Credit

2. Calculate the required amortization for 2017.

Method Required Amortization

Percentage-of-revenue method

Straight-line method

3. At what amount should the computer software costs be reported in the December 31, 2017, balance sheet?

Balance Sheet

Software Development Costs

Less: Amortization to date

Net

+1
Answers (1)
  1. 22 November, 04:04
    0
    According to IAS 38, all expenses incurred on software or other intangible assets development is expensed until technological feasibility is attained.

    This means that of the $6 million cost, $ million will be charged to the income statement as expenses and 2 million capitalized

    Journal entry

    Software

    Dr Cr

    $2,000,000

    Development cost

    Dr Cr

    $2,000,000

    2) Amortization

    percentage of revenue formula = 3/10*2000000

    $600,000

    Straight line = 1/5*2000000 = $400,000

    Using percentage of revenue method

    3) Jan 1 - $ 2,000,000

    Amortization ($ 600,000)

    December 31 net value $1,400,000

    Using the straight line method

    Jan 1 $2,000,000

    Amortization ($400,000)

    December 31 net value $1,600,000
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