The Elegant software Company recently completed the development and testing of n

Question

The Elegant software Company recently completed the development and testing of new software program that provides the ability to transfer data from among a variety of operating systems. The company believes this product will be quite successful and capitalized all of the costs of designing, developing, coding, and testing the software. These costs will be amortized over the expected useful life the software on a straight-line basis. (chapter 10)

Required:

1. Was Elegant correct in its treatment of the software development costs? Why?

2. Explain the appropriate method for determining the amount of periodic amortization for any capitalized software development costs.

Explanation / Answer

Answer a. GAAP require the capitalization of software development costs incurred after technological feasibility is established.   Technological feasibility is established “when the enterprise has completed all planning, designing, coding, and testing activities that are necessary to establish that the product can be produced to meet its design specifications including functions, features, and technical performance requirements.” Therefore, Elegant Software is incorrect in traetement of Software development cost because of the above reason. Therefore, the company is incurring the cost of designing, developing, coding and testing should be expensed as R & D Expenses rather than capitalization. Answer b. The periodic amortization percentage for software development costs is the greater of (1) the ratio of current revenues to current and anticipated revenues (percentage-of-revenue method) or (2) the straight-line percentage over the useful life of the asset.

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