FAR: Software Costs: 4/3/2018 Flashcards
Standard Co. spent $10,000,000 on its new software package that is to be used only for internal use. The amount spent is for costs after the application development stage. The economic life of the product is expected to be three years. The equipment on which the package is to be used is being depreciated over five years.
What amount of expense should Standard report on its income statement for the first full year?
1) $0
2) $2,000,000
3) $3,333,333
4) $10,000,000
$3,333,333
Software costs after reaching the application development cost stage are capitalized rather than written off as expense immediately. The capitalized costs are amortized over the useful life of the product.
Yellow Co. spent $12,000,000 during the current year developing its new software package. Of this amount, $4,000,000 was spent before it was at the application development stage and the package was only to be used internally. The package was completed during the year and is expected to have a 4-year useful life.
Yellow has a policy of taking a full-year’s amortization in the first year. After the development stage, $50,000 was spent on training employees to use the program.
What amount should Yellow report as an expense for the current year?
1) $1,600,000
2) $2,000,000
4) $6,012,500
6) $6,050,000
$6,050,000
Such costs (employee training) are expensed as incurred because training enhances the value of employees, not capitalized assets.
The future benefits of the firm’s assets have not been increased.
$12,000,000 total internally developed software costs
($4,000,000) amount incurred before it was in the
development stage
= $8,000,000 total internally developed software costs to capitalize
N= 4 years
$8,000,000 Capitalized Software/4 year life
= $2,000,000 amortization per year
TOTAL EXPENSE=
$4,000,000 amount incurred bfeore it was in the
development stage
$50,000 training to employees
$2,000,000 Amortization of Cap Softare
= $6,050,000
During 2004, Pitt Corp. incurred costs to develop and produce a routine, low-risk computer software product as follows:
Completion of detailed program design $13,000
Costs incurred for coding and testing to establish technological feasibility 10,000
Other coding costs after establishment of technological feasibility 24,000
Other testing costs after establishment of technological feasibility 20,000
Costs of producing product masters for training materials 15,000
Duplication of computer software and training materials from product masters (1,000 units) 25,000
Packaging product (500 units) 9,000
In Pitt’s December 31, 2004 balance sheet, what amount should be reported in inventory?
1) $25,000
2) $34,000
3) $40,000
4) $49,000
$34,000
This answer includes the costs of producing product masters. This cost is included in capitalized software development costs, an intangible asset.
Until masters are produced, software development has not been completed. These costs are not inventoried because there is no product in which to inventory these costs until the development is complete.
During 2004, Pitt Corp. incurred costs to develop and produce a routine, low-risk computer software product as follows:
Completion of detail program design $13,000
Costs incurred for coding and testing to establish technological feasibility 10,000
Other coding costs after establishment of technological feasibility 24,000
Other testing costs after establishment of technological feasibility 20,000
Costs of producing product masters for training materials 15,000
Duplication of computer software and training materials from product masters (1,000 units) 25,000
Packaging product (500 units) 9,000
In Pitt’s December 31, 2004 balance sheet, what amount should be capitalized as software cost, subject to amortization?
1) $54,000
2) $57,000
3) $59,000
4) $69,000
$59,000
Only software development costs incurred after the point of technological feasibility is reached are capitalized as an intangible and amortized.
Technological feasibility is the point at which the firm makes the decision to continue the product development with the expectation that a workable product is possible. Costs of duplication and packaging are all product costs and, although capitalized, are debited to inventory rather than to software development costs.
The capitalized software costs for this firm are:
Other coding costs after establishment of technological feasibility $24,000
Other testing costs after establishment of technological feasibility 20,000
Costs of producing product masters for training materials 15,000
Total amount subject to amortization $59,000
