[cpa1988]

I do not get this question. I get that amortization is the greater of SL or % of sales. So greater of $150,000 or $60,000. But why is the $600,000 capitalized cost amount also the revenue / sales amount?

On December 31, Year 1, Byte Co. had capitalized software costs of $600,000 with an economic life of four years. Sales for Year 2 were 10% of expected total sales of the software. At December 31, Year 2, the software had a net realizable value of $480,000. In its December 31, Year 2 balance sheet, what amount should Byte report as net capitalized cost of computer software?

a. $450,000

b. $480,000

c. $540,000

d. $432,000

Explanation

Choice “a” is correct. Amortization of capitalized software costs equals the greater of straight-line amortization or sales revenue from the software for the period ÷ total projected sale.

Dec. 31, Year 1 balance $ 600,000

Year 2 amortization = 600,000 ÷ 4 = (150,000)

Dec. 31, Year 2 net capitalized cost $ 450,000

[Anonymous]

The 600,000 is not the sales amount. In this situation no sales amount is given. You are taking the percent of sales for the year (10%) and multiplying that by the capitalized cost to determine whether that amortization amount is greater than the SL method. The 10% represents the ratio of current revenues related to the software to the total estimated revenues from the software. In this case that could have been $100,000 in the current period compared to total estimated revenues of $1,000,000, giving you 10%, but none of that information is given. Does that make any sense? The 600,000 has nothing to do with sales.

[Zuly]

I just worked this problem in Roger Cpa test bank. Hope it makes sense:

Correct! In accordance with the accounting principle of conservatism, capitalized software costs are amortized by the larger of either straight-line or the ratio of actual to total revenue percentages – unless the resulting carrying amount exceeds NRV, in which case the capital software asset will be reported at NRV. Here, the following data apply:

Useful life: 4 years

Straight-line = 1/4 = 25%

Ratio: 10%

Because the straight-line percentage is higher than the ratio of actual to total revenues, it will be used to calculate amortization (25% X $600,000 = $150,000). Because the resulting carrying value is below NRV, it will be reported as the carrying value of the capital software asset.

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[Author]

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