Question

Early in 2018, the Excalibur Company began developing a new software package to be marketed. The project was completed in December 2018 at a cost of $12,000,000. Of this amount, $6,000,000 was spent before technological feasibility was established. Excalibur expects a useful life of five years for the new product with total revenues of $16,000,000. During 2019, revenue of $4,000,000 was recognized.

Required:
1. Prepare a journal entry to record the 2018 development costs.
2. Calculate the required amortization for 2019.
3. At what amount should the computer software costs be reported in the December 31, 2019, balance sheet?
  

Answer 1

1.

Date	Accounts	Debit	Credit
2018	Research & Development Expense	$6,000,000
	Software Developing Cost	6,000,000
	Cash		$12,000,000

2.

Percentage of Revenue method	$1,500,000
Straight line method	1,200,000

Computation of Amortization:

Percentage of revenue method =

Software Development Cost x percentage of revenue recognized.

= $6,000,000 x 25%

= $1,500,000

Percentage of revenue recognized during 2019.

= Revenue recognized / Total Revenues

= 4,000,000 / 16,000,000 x 100

= 25%

Straight line method =Software development cost / Useful Life

= 6,000,000 / 5 years

= $1,200,000

3. Balance Sheet for the year ended december 31, 2019

Software Development Cost	$6,000,000
less: Amortization	1,500,000
Net	$4,500,000

Note: The percentage of revenue method is implemented because it results in higher amortization.