Question

Exercise 10-31 Software development costs [LO10-8]

Early in 2018, the Excalibur Company began developing a new software package to be marketed. The project was completed in December 2018 at a cost of $11,000,000. Of this amount, $9,000,000 was spent before technological feasibility was established. Excalibur expects a useful life of five years for the new product with total revenues of $15,000,000. During 2019, revenue of $6,000,000 was recognized.

Required:
1. Prepare a journal entry to record the 2018 development costs.
2. Calculate the required amortization for 2019.
3. At what amount should the computer software costs be reported in the December 31, 2019, balance sheet?

Prepare a journal entry to record the 2018 development costs. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Journal entry worksheet

Record the 2018 development costs.

Note: Enter debits before credits.

	Event General Journal Debit Credit 1

Calculate the required amortization for 2019.

	Required amortization Percentage-of-revenue method Straight-line method

At what amount should the computer software costs be reported in the December 31, 2019, balance sheet?

	Balance sheet Software development costs Less: Amortization to date Net

Answer 1

SOLUTION

1.

Accounts titles and Explanation	Debit ($)	Credit ($)
Research and development expense	9,000,000
Software development costs	2,000,000
Cash		11,000,000
(To record research and development expense)

Software development costs = Total cost - Research and development expense

= 11,000,000 - 9,000,000 = 2,000,000

2. A. Amortization using percentage of revenue method-

Percentage = Current revenues / Total revenues

=6,000,000 / 15,000,000 = 40%

Amortization = Percenatge * Software development cost

= 40% * 2,000,000 = 800,000

B.  Amortization using straight line method

Amortization = Percentage over useful life * Software development cost

= 1/5 * 2,000,000 = 400,000

When comparing both the methods, amortization under percentage of revenue method is higher, so amortization is 800,000

3.

Particulars	Amount ($)
Software development cost	2,000,000
Less: Amortization	(800,000)
Net	1,200,000