Final answer:
In 2020, PC Software Inc. capitalized $1,200,000 of software development costs. In 2021, it recorded an amortization expense of $240,000. The financial statements must disclose the original capitalized amount, accumulated amortization, and a description of the amortization methods and assumptions.
Step-by-step explanation:
Journal Entries for Software Development Costs
To record the development costs incurred by PC Software Inc., we need to separate the costs incurred before and after the technological feasibility was established. The costs incurred after this point can be capitalized, whereas the costs incurred before are expensed. Since 40% of the $3,000,000 was incurred after technological feasibility, $1,200,000 (40% of $3,000,000) can be capitalized. The journal entry in 2020 will be:
Dr. Capitalized Software Development Costs $1,200,000
Cr. Cash (or Accounts Payable) $1,200,000
The remaining $1,800,000 will be expensed.
For the amortization in 2021, the total capitalized cost will be amortized over the product's estimated useful life of five years. The annual amortization expense will be $1,200,000 divided by 5, which equals $240,000. The journal entry will be:
Dr. Amortization Expense $240,000
Cr. Accumulated Amortization - Software $240,000
As for the required disclosures in the December 31, 2021, financial statements regarding computer software costs, they will include the original capitalized amount, accumulated amortization, and a description of the methods and assumptions used to estimate the amortization.
At December 31, 2021, the unamortized software intangible asset totals $960,000. This is equal to $1,200,000 originally capitalized less amortization in 2021 of $240,000. The amount charged to expense as amortization of software intangible asset in 2021 was $240,000. The estimated net realizable value of computer software is greater said to be greater than the remaining unamortized software intangible asset.