[Lighthaven]

On January 1, Year 1, Alpha Co. signed an annual maintenance agreement with a software provider for $15,000 and the maintenance period begins on March 1, Year 1. Alpha also incurred $5,000 of costs on January 1, Year 1, related to software modification requests that will increase the functionality of the software. Alpha depreciates and amortizes its computer and software assets over five years using the straight-line method. What amount is the total expense that Alpha should recognize related to the maintenance agreement and the software modifications for the year ended December 31, Year 1?

a. $5,000

b. $20,000

c. $13,500

d. $16,000

Choice “c” is correct. The software maintenance costs are expensed, and the software modification costs are capitalized and amortized using the straight line method over five years. Thus, the total expense that Alpha should recognize related to the maintenance agreement and the software modifications for the year ended December 31, Year 1, will be an expense related to the software maintenance cost in the amount of $12,500 ($15,000 ÷ 12 = $1,250 per month × 10 months) plus amortization expense of $1,000 ($5,000 ÷ 5 years = $1,000 per year).

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I understand everything but the amount being expensed for the maintenance costs. I’m wondering why all of these costs were not expensed at once? I think I might be messing this up with R & D and I just wanted to clarify. Thanks!

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And that's all she wrote.