Early in 2013, the Excalibur Company began developing a new software package to

Question

Early in 2013, the Excalibur Company began developing a new software package to be marketed. The project was completed in December 2013 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 2014, revenue of $3 million was recognized.

1) Calculate the required amortization for 2014. (Enter your answers in whole dollars.)

a) percentage of revenue method?

b) Straight line method?

2) At what amount should the computer software costsbe reported in the 12/31/14 balance sheet? roundto whole numbers

software development costs 2,000,000

a) less: amortization to date ?

b) Net ?

   

Explanation / Answer

software development cost = 6 - 4 = 2 million = 2,000,000

As cost incurred before technical feasibility was established is charged as expense and not capitalised.

1a)Amortization = cost * revenue in 2014 /total estimated revenue

                          = 2 ,000,000 * 3 /10

                           = $ 600,000

b)straight line amortization = cost/useful life

                                               = 2,000,000 / 5

                                              = $ 400,000

2)

Straight line method % of revenue method cost 2,000,000 2,000,000 less:Amortization to date (400,000) (600,000) net cost 1,600,000 1,400,000

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