Question

Bloomingtech is an Enterprise Resource Planning (ERP) software development corporation which specializes in providing technological solutions for firms to better manage their businesses. Being in the technology industry, research and development (R&D) is one of the largest expenditures. For example, in the second quarter of fiscal year 2018 alone, Bloomingtech’s internal books reveal that the company has generated the following R&D expenditures directly attributable to the software they plan to develop and sell: - Incurred $5,000,000 as an effort to establish technological feasibility of an ERP software - Incurred $3,000,000 in production costs, after they had decided that the software is a viable product In addition to the development of software for sale, Bloomingtech also developed a specialized software that will help with their internal accounts payable system. During the fiscal quarter, the company spent $1,000,000 on the software which will be for internal use only and not for resale. An accounting intern at the firm approaches you, the senior manager, and asked for your advice on how to properly record and recognize these expenditures. Should the firm treat all the expenditures the same? Differently?

Answer 1

Expenditure incurred as an effor to establish technoligical feasibility of an ERP software, i.e $5,000,000, and expenditure incurred in production cost of the same software, i.e $3,000,000, should be treated as total cost incurred by Bloomingtech to develop ERP software which is meant for sale.

whereas $1,000,000 spent on software which is not meant for sale should be treated as fixed asset because it is going to be used by the company for internal accounts payable system and also not for sale.