Question

Parker Corp. develops computer video games for sale. A new development project which began in 2018 reached technological feasibility at the end of Sept. 2019 and the project was available for release to customers early in 2020. Development costs incurred prior to Sept. 30 were $1,600,000 and costs incurred from Oct. 1 to product availability were $1,200,000. Revenues in 2020 from the sale of the new product were $4,000,000 and the company anticipates another $12,000,000 in revenues. The economic life of the software is 3 years.

(a) What amount should Parker capitalize as an intangible asset?

(b) What amount should be amortized in 2020?

(c) At the beginning of 2021, Parker estimates the net realizable value of the software to be $500,000. Prepare any entries required.

Answer 1

Solution)

(a) The project which began in the year 2018, reached technical feasibility at the end of September 2019.

The development cost incurred prior to September 30, 2019 would be termed as research expenses which were equal to $1,600,000. This research expenses will be charged to Profit & Loss A/c.

The costs incurred from October 2019 to the availability of the product were $1,200,000. This cost will be termed as development cost and the same will be capitalized.

Parker should capitalize $1,200,000 as an intangible asset.

(b) The amount to be capitalized as an intangible asset = $1,200,000.

The revenues in 2020 from the sale of the new product = $4,000,000.

It is given that the economic life of the software = 3 years.

The company expects further $12,000,000 in revenues in the next two years.

So, the amount that should be amortized in 2020

= Amount capitalized in 2020 x {Revenues in 2020 from the sale of new product/ (Revenues in 2020 from the sale of the new product + Further revenues from the sale of the new product)}

= $1,200,000 x {$4,000,000/ ($4,000,000 + $12,000,000)}

= $300,000

(c) The Written Down Value of the software at the end of 2020 or the Written Down Value of the software at the beginning of 2021

= Amount capitalized in 2020 - Amount amortized in 2020

= $1,200,000 - $300,000

= $900,000

At the beginning of 2021, Parker estimates the net realizable value of the software to be $500,000

Therefore, Impairment of the software

= The Written Down Value of the software at the beginning of 2021 - The net realizable value of the software as at the beginning of 2021

= $900,000 - $500,000

= $400,000