Question

Garrett Corporation began operations in 2021. To maintain its accounting records, Garrett entered into a two-year agreement with Accurite Company. The agreement specifies that Garrett will pay $35,000 to Accurite immediately, and in return, Accurite will make its accounting software accessible via the Internet to Garrett and maintain all infrastructure necessary to run the software and store records. At any time, Garrett Corporation can freely remove its records and run the software on its own hardware or that of another accounting services company. In addition to the cost of the agreement, Garrett incurred $5,000 early in the year devising a plan for its accounting software needs, $15,000 for customizing its own computers for integration with Accurite’s software, and $10,000 after the software was implemented to train its employees.

Determine the initial amount that Garrett should capitalize related to the software development costs.

capitalized cost = ?

Answer 1

The cost which should be capitalized is $65,000.

Explanation

While purchasing an asset (whether it is tangible or intangible), the company have to capitalize costs which are incurred on the purchase of such asset.

Such costs includes :

• Cost of asset.
• Transportation/delivery costs.
• Initial setup costs.
• Engineering costs.
• Employees training costs (if related to the use of such an asset).
• Other customisation costs.

Given situation as follows :

Garrett Corporation began operations in 2021. To maintain its accounting records, Garrett entered into a two-year agreement with Accurite Company. The agreement specifies that Garrett will pay $35,000 to Accurite immediately, and in return, Accurite will make its accounting software accessible via the Internet to Garrett and maintain all infrastructure necessary to run the software and store records. At any time, Garrett Corporation can freely remove its records and run the software on its own hardware or that of another accounting services company. In addition to the cost of the agreement, Garrett incurred $5,000 early in the year devising a plan for its accounting software needs, $15,000 for customizing its own computers for integration with Accurite’s software, and $10,000 after the software was implemented to train its employees.

So, in the given case the initial amount that Garrett should be capitalised related to the software development costs are :

Initial purchase cost $ 35,000
Plan devising cost 5,000
(for accounting software needs)
Customizing costs incurred 15,000
Employees training costs 10,000

Total costs to be capitalised $ 65,000