Question

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

Answer 1

Step-by-step explanation:

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