Question

In: Accounting

Intangible asset PP LLC had $20 million of capitalised development expenditure at cost brought forward at...

Intangible asset

PP LLC had $20 million of capitalised development expenditure at cost brought forward at January 1, 2007 in respect of products currently in production and a new project began on the same date.

The research stage of the new project lasted until March 31, 2007 and incurred 1.4 million USD of costs. From that date, the project incurred development costs of $800,000 per month. On July 1, 2008 the directors became confident that the project would be successful and yield a profit well in excess of costs. The project was still in development at December 31, 2008. Capitalised development expenditure is amortised at 20% per annum using the straight-line method.

Required:

What amount will be charged to profit or loss for the year ended January 30, 2008 in respect of research and development costs?

Expert Solution

Step : 1

The Research stage of the new project incurred new cost Up to March 31, 2007 = $1.4 million

Step : 2

Project incurred development costs = $800,000 per month ($0.8 Millions)

So its 3 months (3 months X $0.8millions) = $2.4 Millions

Step : 3

1July 2008 to 31 December 2008 Development cost capitalised

(6 months X $0.8millions) = $4.8 Millions (This cost is Not Amortised)

Step : 4

Capitalised development expenditure is amortised @ 20% per annum using the straight-line method.

Capitalised development expenditure at cost = 20Millions

Amortised @ 20% Per Annum

= $20 Millions X 20% = $4 millions

Total amount will be charged to profit or loss for the year ended January 30, 2008 in respect of research and development costs is :

= $1.4 M + $2.4 M + $4 M (step1+step2+step4)

= $ 7.8 Millions

Notes :

Step 3 is not considered into consideration. Because 31 December 2018 project ongoing, therefore expenditure on the project is still being incurred so this project’s capitalised values are NOT being amortised.
Amortisation starts on the date the project is launched into the market and starts to earn revenues Amounts

ekkarill92 answered 2 years ago

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