FAR 9.03 - COMPUTER SOFTWARE COSTS AND OTHER ASSETS Flashcards
FAR 9.03 - COMPUTER SOFTWARE COSTS AND OTHER ASSETS
On December 31, 20X0, Byte Co. had capitalized software costs of $600,000 with an economic life of four years.Sales for 20X1 were 10% of expected total sales of the software. At December 31, 20X1, the software had a net realizable value of $480,000. In its December 31, 20X1 balance sheet, what amount should Byte report as net capitalized cost of computer software?
$540,000
$480,000
$432,000
$450,000
$450,000
EXPLANATION
In accordance with the accounting principle of conservatism, capitalized software costs are amortized by the larger of either straight-line or the ratio of actual to total revenue percentages – unless the resulting carrying amount exceeds NRV, in which case the capital software asset will be reported at NRV. Here, the following data apply:
Useful life: 4 years
Straight line = 1/4 = 25%
Ratio = 10%
=» 25% > 10% => Use Straight Line (unless CV>NRV)
Because the straight-line percentage is higher than the ratio of actual to total revenues, it will be used to calculate amortization (25% X $600,000 = $150,000).
Because the resulting carrying value is below NRV, it will be reported as the carrying value of the capital software asset.
FAR 9.03 - COMPUTER SOFTWARE COSTS AND OTHER ASSETS
Very early in 20X3, while developing software for sale to others, after achieving technological feasibility but
before the commencement of commercial production, X Company incurred $320,000 to produce product
masters and to test the software. X Company estimated that the software will be sold for a total of 10 years.After nearly a full year of selling, X had revenues from software sales of $120,000 in 20X3. Sales in future periods are expected to amount to $680,000. Costs associated with producing and packaging the software approximate 10% of revenues.
What portion, if any, of the $320,000 will be recognized in income in 20X3?
$48,000
$0
$320,000
$32,000
$48,000
EXPLANATION:
Costs incurred after reaching technological feasibility but before commercial production, such as the production of product masters, are capitalized and amortized.
The amount of amortization will be the greater amount when calculated under both the straight-line method and the volume of output approach.
Under straight-line, amortization will be 10% of $320,000 or $32,000.
Under the volume of output approach the ratio of current sales, $120,000, to the total of current and estimated future sales, $120,000 + $680,000 or $800,000, is multiplied by the $320,000 carrying value of the amortizable costs to determine amortization of , $120,000/$800,000 x $320,000 = $48,000.
Since it is larger, $48,000 will be the amount of amortization in 20X3.
In addition, X will determine if the carrying value of the software exceeds its net realizable value from future sales.
Future sales are expected to be $680,000. With costs of only 10% or $68,000, the remaining $612,000 exceeds the carrying value of the software indicating no need for further amortization.
FAR 9.03 - COMPUTER SOFTWARE COSTS AND OTHER ASSETS
A company began developing computer software to be sold as a separate product on January 1, year 1. During the planning, coding, and testing phases, the company incurred $1,300,000 of costs. On June 30, year 1, the product was determined to be technologically feasible. The company began producing product masters of the software and incurred an additional $750,000 of costs from July 1, year 1, through September 30, year 1. After the software was available for release on October 1, year 1, the company incurred an additional $275,000 of costs relating to maintenance and customer support.
What amount of software-related costs should be
capitalized?
$275,000
$2,050,000
$1,300,000
$750,000
$750,000
EXPLANATION:
Until technological feasibility is achieved, all costs incurred in the development of software are recognized as expense when incurred.
Once technological feasibility has been achieved, until the commencement of commercial production, costs of
producing masters and other costs are capitalized.
Once the software is available for release, costs incurred are either product costs or are recognized as expense.
As a result, the costs to be capitalized will be the $750,000 spent producing masters.
FAR 9.03 - COMPUTER SOFTWARE COSTS AND OTHER ASSETS
Wind Co. incurred organization costs of $6,000 at the beginning of its first year of operations. How should Wind treat the organization costs in its financial
statements in accordance with GAAP?
Amortized over 40 years.
Amortized over 60 months.
Never amortized.
Expensed immediately.
Expensed immediately.
EXPLANATION:
Under GAAP, all organization costs are expensed immediately
FAR 9.03 - COMPUTER SOFTWARE COSTS AND OTHER ASSETS
On January 1, year 1, Alpha Co. signed an annual maintenance agreement with a software provider for $15,000 and the maintenance period begins on March 1, year 1. Alpha also incurred $5,000 of costs on January 1, year 1, related to software modification
requests that will increase the functionality of the software. Alpha depreciates and amortizes its computer and software assets over five years using the straight-line method.
What amount is the total expense that Alpha should recognize related to the maintenance agreement and the software modifications for the year ended December 31, year 1?
$13,500
$16,000
$5,000
$20,000
$13,500
EXPLANATION:
The $5,000 in software asset modifications should be capitalized and amortized, such that year 1 depreciation expense is $1,000 ($5,000 / 5 = $1,000).
The annual maintenance agreement will be expensed for the portion of year 1 that it was in effect ($15,000 X (10/12) = $12,500.
The total expense that Alpha should recognize related to the maintenance agreement and the software modifications for year 1 is $13,500 ($12,500 + $1,000 = $13,500).
FAR 9.03 - COMPUTER SOFTWARE COSTS AND OTHER ASSETS
Mark incurred the following computer software costs for the development and sale of software programs during the current year:
Planning costs -$50,000
Design of the software - $150,000
Substantial testing of project’s initial stages- $75,000
Production/packaging costs for the first
month’s sales - $500,000
Costs of producing product masters after
technological feasibility established- $200,000
The project was not under any contractual arrangement when these expenditures were incurred. What amount should Mark report as research and development expense for the current year?
$975,000
$500,000
$200,000
$275,000
$275,000
EXPLANATION:
When developing computer software, costs incurred up to the point at which technological feasibility is achieved are recognized as research and development costs and reported as expenses in the period incurred.
Once technological feasibility is achieved, costs incurred up until production begins are capitalized to the software.
Costs incurred when the software is in production are included in inventory and cost of sales.
In this case, the costs incurred before reaching technological feasibility include the planning costs of $50,000, the design costs of $150,000, and the testing during the initial stages of $75,000 for a total of $275,000.
The $200,000 cost of producing masters would be capitalized to the software and the $500,000 in production and packaging costs would be recognized in inventory
FAR 9.03 - COMPUTER SOFTWARE COSTS AND OTHER ASSETS
On January 1, year 1, a company capitalized $100,000 of costs for software that is to be sold. The company
amortizes the software costs on a straight-line basis over five years. The carrying value of the software costs on January 1, year 3, was $60,000. As of December 31, year 3, the estimated future gross revenue to be generated from the sale of the software is $23,000, and the estimated future cost of disposing of the software is $8,000.
What amount should the company expense related to the software costs for the year ended December 31, year 3?
$45,000
$18,400
$20,000
$37,000
$45,000
As of January 1 of year 3, there are 3 years that remain on the software’s expected life and with a remaining carrying value of $60,000, amortization would be $20,000, which would reduce the carrying value to $40,000.
In addition, however, the resulting carrying value is compared to the net realizable value that will be derived from sales of the software.
Future sales will generate $23,000 in revenues at a cost of $8,000, making the net realizable value $15,000.
The software will be written down to that amount, requiring an additional reduction of $25,000 and a total expense of $45,000.
