On August 1, 2016, Reliable Software began developing a software program to allo

Question

On August 1, 2016, Reliable Software began developing a software program to allow individuals to customize their investment portfolios. Technological feasibility was established on January 31, 2017, and the program was available for release on March 31, 2017. Development costs were incurred as follows:

August 1 through December 31, 2016 $6,600,000
January 1 through January 31, 2017 1,230,000
February 1 through March 31, 2017 1,630,000

Reliable expects a useful life of five years for the software and total revenues of $8,300,000 during that time. During 2017, revenue of $2,324,000 was recognized.

Required: 1. Prepare the journal entries to record the development costs in 2016 and 2017.

Explanation / Answer

December 31,2016 Research and development a/c Dr $6600000

Cash a/c $6600000

Jan 31,2017 Research and development a/c Dr $1230000

Cash a/c $1230000

March 31,2017 Research and development a/c Dr $1630000

Cash a/c $1630000

(Total development cost incurred for software)

Software a/c Dr $9460000

To Research and Development a/c $9460000

(Being software developed and was realsed on 31, March 2017)

31 December,2017

Amortization expense a/c Dr $2648800

Software a/c $2648800

(Being the amount amortized from thge greater of the two approches mentioned blow)

Percent to Revenue Approach= (Revenue of the year)/(Total revenue)* (cost of software)= $2324000/8300000*9460000= $2648800

Straigth Line Method=1/5years*9460000=$1892000

Greater one will be amortized

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