Question

Cantor Corporation acquired a manufacturing facility on four acres of land for a lump-sum price of $8,000,000. The building included used but functional equipment. According to independent appraisals, the fair values were $4,500,000, $3,000,000, and $2,500,000 for the building, land, and equipment, respectively. The initial values of the building, land, and equipment would be:

	a.	Building Land Equipment $4,500,000 $3,000,000 $2,500,000
	b.	Building Land Equipment $4,500,000 $3,000,000 $500,000
	c.	Building Land Equipment $3,600,000 $2,400,000 $2,000,000
	d.	Building Land Equipment $4,000,000 $2,500,000 $1,500,000

Axcel Software began a new development project in 2015. The project reached technological feasibility on June 30, 2016, and was available for release to customers at the beginning of 2017. Development costs incurred prior to June 30, 2016, were $3,200,000 and costs incurred from June 30 to the product release date were $1,400,000. The 2017 revenues from the sale of the new software were $4,000,000, and the company anticipates additional revenues of $6,000,000. The economic life of the software is estimated at four years. 2017 amortization of the software development costs would be:

	a.	$0
	b.	$350,000
	c.	$1,840,000
	d.	$560,000

Answer 1

1. As the company has purchased assets on the Lump Sum basis and the fair value of the assets cumulatively exceeds the Lump-sum cost, therefore initial values to be recorded should be proportionate to the fair values of the asset.

Computation of initial values to be recorded should be proportionate to the fair values of the asset:

Particulars	Fair Value	Proportionate of total assets	Initial Values to be recorded
	A	B	C = $8,000,000*B
Building	$4,500,000	45.00%	$3,600,000.00
Land	$3,000,000	30.00%	$2,400,000.00
Equipment	$2,500,000	25.00%	$2,000,000.00
Total	$10,000,000	100.00%	$8,000,000.00

Therefore, option c is the correct answer.

2. Only the expenses incurred after reaching the technical feasibility can be capitalized as the Development costs i.e. Intangible costs.

All the other expenses incurred on developing such asset should be immediately write off.

As the project has reached technological feasibility on June 30, 2016, the expenses incurred after June 30, 2016 i.e. $1,400,000 will be capitalized costs

Computation of amortization expenses for Year 2017:

Particulars		Software
		$
Capitalized Cost	A	1,400,000
Estimated Salvage value	B	0
Value to be amortized in its useful life	C=A+B	1,400,000
Remaining Useful Life of Asset (in Years)	D	4
Amortization value per year as per SLM	E=C/D	350,000

Therefore, option b i.e. $350,000 is the correct answer.