Question

On December 31, 2015, Bit Co. had capitalized costs for a new computer software product with an economic life of five years. Sales for 2016 were 30 percent of expected total sales of the software. At December 31, 2016, the software had a fair value equal to 90 percent of the capitalized cost. What percentage of the original capitalized cost should be reported as the net amount in Bit's December 31, 2016, balance sheet?

a) 70%
b) 72%
c) 80%
d) 90%

Answer 1

The net amount in Bit Co.'s December 31, 2016, balance sheet should be reported as 80% of the original capitalized cost.

Step-by-step explanation:

The net amount in Bit Co.'s December 31, 2016, balance sheet should be reported as 80% of the original capitalized cost. To calculate this, we need to consider the sales for 2016 and the fair value of the software at the end of the year.

The sales for 2016 were 30% of the expected total sales of the software. So, if we assume the expected total sales were x, then the sales for 2016 would be 0.3x.

At December 31, 2016, the fair value of the software was equal to 90% of the capitalized cost. So, if we assume the capitalized cost was y, then the fair value at the end of 2016 would be 0.9y.

Therefore, to calculate the net amount in the balance sheet, we use the formula: Net amount = Capitalized cost - (Sales for 2016 - Fair value at December 31, 2016). Substituting the values, we get: Net amount = y - (0.3x - 0.9y).

Since the goal is to find the percentage of the original capitalized cost, we divide the net amount by the capitalized cost: Percentage = (Net amount / Capitalized cost) * 100.

After simplifying the equation, we find that the percentage is 80%. Therefore, the correct answer is c) 80%.