Early in the year 2016, the Adonis Software Company began developing a new softw

Question

Early in the year 2016, the Adonis Software Company began developing a new software package to be marketed. The software was available for general release to customers in December of 2016. The costs incurred prior to December were $10 million. Of this amount, $6 million was spent before technological feasibility was established. Adonis expects a useful life of three years for the new product with total revenues of $20 million. During 2017, revenue of $5 million was recognized.

Required:

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

2. Calculate the required amortization for 2017.

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

Explanation / Answer

cost incurred before technological feasibility is established ,is charged as expense.so expense incurred before 2016 is charged as expense and remaining is capitalised .

Expense capitalised =10 - 6 = $ 4 million

1)computer Software    Debit   4

    Development expenses credit 4

[being development cost capitalized]

2)Amortization =$ 4 * 5 /20

                             = 1 million

3)computer software     4

less:amortization        (1)

Net value                     3 million   to be reported in balance sheet

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