FAR - R&D Costs + Software Costs

n December 31, 20X1, Bit Co. had capitalized costs for a new computer software product with an economic life of 5 years. Sales for 20X2 were 30% of expected total sales of the software. On December 31, 20X2, the software had a net realizable value equal to 90% of the capitalized cost. What percentage of the original capitalized cost should be reported as the net amount on Bit's December 31, 20X2, balance sheet? 1 70% 2 72% 3 80% 4 90%

1 70% FASB ASC 985-20-35-1 provides: "The annual amortization shall be the greater of the amount computed using (a) The ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues for that product, or (b) The straight-line method over the remaining estimated economic life of the product including the period being reported on." Ratio of current to total revenues (given) = 30% Straight-line rate = 1/5 = 20% The greater of these, 30%, would be used in computing 20X2 amortization, leaving a net amount of 70% (100% − 30%) to be shown on Bit's December 31, 20X2, balance sheet.

Which of the following is a research and development cost? 1 Development or improvement of techniques and processes 2 Offshore oil exploration that is the primary activity of a company 3 Research and development performed under contract for others 4 Market research related to a major product for the company

1 Development or improvement of techniques and processes

How should NSB, Inc., report significant research and development costs incurred? 1 Expense all costs in the year incurred 2 Capitalize the costs and amortize over a 5-year period 3 Capitalize the costs and amortize over a 40-year period 4 Expense all costs 2 years before and 5 years after the year incurred

1 Expense all costs in the year incurred

Stam Co. incurred the following research and development project costs during the current year: Equipment purchased for current and future projects $100,000 Equipment purchased for current projects only 200,000 Research and development salaries for current projects 400,000 Legal fees to obtain patent 50,000 Material and labor costs for prototype product 600,000 The equipment has a 5-year useful life and is depreciated using the straight-line method. What amount should Stam recognize as research and development expense at year-end? 1 $450,000 2 $1,000,000 3 $1,220,000 4 $1,350,000

3 $1,220,000 Research and development costs are identified in five categories: Materials, equipment, and facilities used in R&D activities Personnel engaged in R&D activities Intangibles purchased or developed for use in R&D activities Contract services acquired and used in conjunction with R&D activities Indirect costs reasonably allocable to R&D activities A particularly important aspect of determining whether items included in (1) and (3) above are research and development is whether the item (e.g., machinery, equipment, patent) has an alternative use in other R&D projects. If an alternative use exists, the cost is capitalized as a tangible or intangible asset and depreciated or amortized. The periodic depreciation or amortization is identified as R&D expense as long as the asset is used in R&D activity. If no alternative use exists, the expenditure is charged to R&D in the period of acquisition. Costs to obtain a patent are not R&D expenditures and should be capitalized. The research and development expenses include the following:

Brill Co. made the following expenditures during 20X1: Costs to develop computer software for internal use in Brill's general management information system $100,000 Costs of market research activities 75,000 What amount of these expenditures should Brill report in its 20X1 income statement as research and development expenses? 1 $175,000 2 $100,000 3 $75,000 4 $0

4 $0 Neither of these costs meets the definition of research and development cost: - Development of software for internal use is likely excluded from the applicability of FASB ASC 730-10-15-5. - Marketing research is specifically excluded from the definition of research and development by FASB ASC 730-10-15-4. Research and development costs are defined as the "planned research...for new knowledge" and "the translation of research findings...into a...design for a new product or process." (FASB ASC 730-10-20)

On January 1, year 1, a company capitalized $100,000 of costs for software that is to be sold. The company amortizes the software costs on a straight-line basis over five years. The carrying value of the software costs on January 1, year 3, was $60,000. As of December 31, year 3, the estimated future gross revenue to be generated from the sale of the software is $23,000, and the estimated future cost of disposing of the software is $8,000. What amount should the company expense related to the software costs for the year ended December 31, year 3? 1 $18,400 2 $20,000 3 $37,000 4 $45,000

4 $45,000 Software production costs are capitalized and reported at the lower of unamortized cost or net realizable value (NRV) once technological feasibility has been met. The unamortized cost is $60,000 and the NRV is $15,000 ($23,000 − $8,000); therefore, the software should be written down by $45,000 (i.e., expensed) to the NRV of $15,000.

During 20X1, Orr Co. incurred the following costs: Research and development services performed by Corp. for Orr $150,000 Design, construction, and testing of preproduction prototypes and models 200,000 Testing in search for new products or process alternatives 175,000 In its 20X1 income statement, what should Orr report as research and development expense? 1 $150,000 2 $200,000 3 $350,000 4 $525,000

4 $525,000

Yellow Co. spent $12,000,000 during the current year developing its new software package. Of this amount, $4,000,000 was spent before it was at the application development stage and the package was only to be used internally. The package was completed during the year and is expected to have a 4-year useful life. Yellow has a policy of taking a full-year's amortization in the first year. After the development stage, $50,000 was spent on training employees to use the program. What amount should Yellow report as an expense for the current year? 1 $1,600,000 2 $2,000,000 3 $6,012,500 4 $6,050,000

4 $6,050,000 Costs incurred to develop software for internal use are capitalized after the application development stage is reached (in accordance with FASB ASC 350-40-35-4). The costs are amortized over the benefited period—four years in this case. Costs incurred prior to the application development stage are expensed, as are training costs incurred after the development stage. Therefore, the amount expensed is: Pre-development stage costs $4,000,000 Amortization of capitalized costs: $8,000,000 / 4 years 2,000,000 Training costs 50,000 Total expenses $6,050,000

If a computer software arrangement does not require significant production, modification, or customization of software, when will revenue be recognized? 1 When persuasive evidence of an arrangement exists 2 When delivery has occurred 3 When the vendor's fee is fixed or determinable, and collectibility is probable 4 All of the answer choices are necessary.

4 All of the answer choices are necessary. If a computer software arrangement does not require significant production, modification, or customization of software, revenue shall be recognized when all of these criteria are met.

What expenses and/or losses result from the development and production of software to be sold or leased? 1 Research and development expense 2 Amortization expense 3 Impairment loss 4 All of the answer choices are possible expenses or losses.

4 All of the answer choices are possible expenses or losses. Computer software costs to be sold, leased, or otherwise marketed are charged to expense as research and development until technological feasibility has been established for the product. Technological feasibility is established on completion of a detailed program design or completion of a working model. After technological feasibility has been established, all software production costs are capitalized and subsequently reported at the lower of unamortized cost or net realizable value. Capitalized computer software costs are amortized on the basis of current and future revenue for each product with the minimum annual amortization equal to the straight-line amortization over the remaining estimated economic life of the product. An impairment loss would be recognized if the net realizable value was determined to be less than the amortized cost.

A company's research department incurred $1,000,000 in material, labor, and overhead costs to construct a prototype of a new product and $100,000 to test and modify the prototype. Which of the following statements correctly describes the accounting treatment of prototype costs incurred by the company? 1 Capitalize $1,100,000 and amortize it over the expected sales life of the new product. 2 Capitalize $1,100,000 and amortize it over the life of the prototype. 3 Capitalize $1,000,000 and amortize it over the life of the prototype and expense $100,000 as incurred. 4 Expense $1,100,000 as incurred.

4 Expense $1,100,000 as incurred. All research and development costs are expensed when incurred. A useful way to determine if costs are research and development costs is to establish if they relate to activities identified with the period prior to the beginning of commercial production. Research and development costs are identified in five categories: (1) materials, equipment, and facilities; (2) personnel; (3) intangibles; (4) contract services; and (5) indirect costs. A prototype is a preliminary or first model, often built for demonstration purposes (not production) from which other forms are copied or developed. Both the $1,000,000 and the $100,000 qualify as R&R cost and should therefore be expensed as incurred. The remaining answer choices are all incorrect as the items cannot be capitalized.

Which of the following expenditures qualifies for asset capitalization? 1 Cost of materials used in prototype testing 2 Costs of testing a prototype and modifying its design 3 Salaries of engineering staff developing a new product 4 Legal costs associated with obtaining a patent on a new product

4 Legal costs associated with obtaining a patent on a new product