Axcel Software began a new development project in 2008. The project reached technological feasibility on June 30, 2009 and was available for release to customers at the beginning of 2010. Development costs incurred prior to June 30, 2009 were $3,200,000 and costs incurred from June 30 to the product release date were $1,400,000. 2010 revenues from the sale of the new software were $4,000,000 and the company anticipates additional revenues of $6,000,000. The economic life of the software is estimated at four years. 2010 amortization of the software development costs would be:
A)$ 0.
B)$ 350,000.
C)$1,840,000.
D)$ 560,000.Percentage of-revenue method: $4,000,000 ($4,000,000 + 6,000,000) = 40 % Straight-line method: ¼ or 25%
Amortization = $1,400,000 40% = $560,000

Question

Quizplus · Accepted Answer

The most appropriate amortization method to use in this case is the percentage-of-revenue method. Based on this method, the amortization expense for 2010 is equal to the percentage of revenues earned in the current year times the total development costs incurred. Therefore, the amortization expense for 2010 is $1,400,000 x 40% = $560,000. The straight-line method is not appropriate in this case because it does not take into account the pattern of future revenues. Therefore, the best choice is option D, which represents the amortization expense using the percentage-of-revenue method.

Axcel Software Began a New Development Project in 2008