Question

On August 1, 2021, Reliable Software began developing a software program to allow individuals to customize their investment portfolios. Technological feasibility was established on January 31, 2022, and the program was available for release on March 31, 2022. Development costs were incurred as follows:
August 1 through December 31, 2021 $ 6,300,000
January 1 through January 31, 2022 1,200,000
February 1 through March 31, 2022 1,600,000

Reliable expects a useful life of five years for the software and total revenues of $8,000,000 during that time. During 2022, revenue of $2,000,000 was recognized.


1. Prepare the journal entries to record the development costs in 2021 and 2022.
2. Calculate the required amortization for 2022.

Answer 1

Answer:

The answer is given below;

Explanation:

1. August 1-December 31,2021

Research Costs Dr.$6,300,000

Account Payable Cr.$6,300,000

January 1-January 31,2022

Research Costs    Dr.$1,200,00

Accounts Payable Cr.$1,200,000

February 1-March 31,2022

Development Costs   Dr.$1,600,000

Accounts Payable      Cr.$1,600,000

Generally the software projects are divided into three stages feasibility studies, software production and software distribution. As per GAAP, only those costs are capitalized which are incurred in software production stage.

In our case, the costs incurred  after release of technical feasibility i.e January 31,2022 are capitalized.

2. 1,600,000/5=$320,000