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: Prepare a journal entry to record the 2016 development costs. Calculate the required amortization for 2017. At what amount should the computer software costs be reported in the December 31, 2017 balance sheet?

Explanation / Answer

Solution:

1).Journal entryto record 2016 development costs:

a). Research and development expenses 6,000,000

Cash 6,000,000

b). Computer Software Costs 4,000,000

Cash 4,000,000

2).Amortization for 2017:

Percent of Revenue Approach =( 5,000,000/20,000,000) * 4,000,000 = $1,000,000

Straight-Line Approach =$ 4,000,000/3 = $1,333,333

So the higher of the above two will be taken as amortization value for 2017 , which is $1,333,333

3) Amount at which the computerSoftware be reported in December 31,2017 balance sheet is ($4,000,000-$1,333,333) = $2,666,667   

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