Early in 2016, the Excalibur Company began developing a new software package to

Question

Early in 2016, the Excalibur Company began developing a new software package to be marketed. The project was completed in December 2016 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 2017, revenue of $3 million was recognized. Required: 1. Prepare a journal entry to record the 2016 development costs. 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

Excalibar Company Details Amt $ The expenses upto establishment of   feasibilty will be treated as R& D cost. So out of $6 million, $4 million will be   expensed and $2 million will be capitalized. Journal Entry for development costs Event Account Title Dr $ Cr $            1 Research & Development Cost        4,000,000 Cash       4,000,000 Software Development cost (Intangible Asset)        2,000,000 Cash     2,000,000            2 Amortization in 2017 Total Estimated Revenue        10,000,000 Revenue recognized in 2017        3,000,000 % Revenue Recognized   30% Amortization by % of revenue method =2M*30%=            600,000 Useful Life of software 5 years Straight Line depreciation per year =            400,000 So Depreciation in 2017 by SL method =            400,000            3 Greater amount of % of revenue method or SL method depreciation will be recognized. So $ 600,000 of depreciation ti be recignized. Balance Sheet Details Amt $ Software Davelopment Cost        2,000,000 Less: Amortization to date =            600,000 Net Balance          1,400,000

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