Complete Question is as under:
On September 30, 2016, Athens Software began developing a software program to shield personal computers from malware and spyware. Technological feasibility was established on February 28, 2017, and the program was available for release on April 30, 2017. Development costs were incurred as follows:
September 30 through December 31, 2016 $ 2,310,000
January 1 through February 28, 2017 910,000
March 1 through April 30, 2017 510,000
Athens expects a useful life of four years for the software and total revenues of $7,000,000 during that time. During 2017, revenue of $1,050,000 was recognized.
Required:
1. Prepare the journal entries to record the development costs in 2016 and 2017. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)
2. Calculate the required amortization for 2017. (Enter your answer in whole dollars.)
Answer:
Part A. Journal Entries are given below in the explanation.
Part B. $102,000
Explanation:
Software expense prior to the feasibility stage which is also known as research stage are treated as an expense during the year and the expenses incurred after the feasibility stage which is also referred as development stage are capitalized.
The expenses here which qualify for the research costs are the expenditure prior to the development stage starting point which is February 28, 2017. So prior to this, all the costs incurred were $2,310,000 for 2016 and $910,000 for 2017 which would be treated as expense and from this date, all the costs incurred would be treated as Asset.
Entries prior to the development stage:
2016
Dr Research Expense 23,10,000
Cr Cash 23,10,000
Entries after February 28, 2017 which is the feasibility point will be as under:
2017
Dr Research expense 9,10,000
Dr Software development costs 5,10,000
Cr Cash 14,20,000
2. Calculate the amortization for 2019 as shown below:
Using percentage of revenues method
Amortization = Current revenue / Total revenue * Software development costs
= $10,50,000/$70,00,000*$510,000
= $76,500
Amortization can be calculate using the following formula:
Amortization of intangible asset = Software development costs / Useful life
Amortization of intangible asset = $510,000 / 5 years = $102,000
