In reviewing CM2 financial projections, which contains the forecasted financial

Question

In reviewing CM2 financial projections, which contains the forecasted financial statements for 2013, you note that R&D expenses are projected to be $200,000. Knepp and Lopez indicate that 15% of this figure is related to software costs on a project that the project manager claims has reached “technological feasibility.” In addition, $70,000 are for employee wages in developing a patent for the newly developed software; $59,000 represent attorneys’ fees for filing a patent on the software, and patent filing fees were $1,000. The patent is expected to be approved in late December 2010. The remaining amount of R&D cost is for projects whose success is highly uncertain. Instructions Search the authoritative literature (e.g., using the FASB Codification) to determine the official guidance on software costs. Prepare a memo to CM2 management explaining how software costs are to be recorded—when to consider them as expenses and when to record them as assets. Use the CM2 example above to illustrate the points in your memo.

Explanation / Answer

Totl costs=$200,000

technological feasibility= 15%*200,000=$30,000

Eployee wages=$70,000

attorney fees=$59,000

Patent filing fee=$1,000

Uncertain projects=$40,000

1)Technological feasibility amount of $30,000 should be capitalized as we are sure of the succes of the project. It is also relatng to software which is tangible .

2)Employee costs of $70,000 has to be taken as expense for the year occured since it is cost incurred for patent

4)Legal ocsts of $59,000 and $1,000 for patent development can be capitalized as per rules so consider as assets and amortize them.

5) Remaining costs of $40,000 is uncertain so it has to be taken as R&D cost for year incurred.

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