CFA Practice Question

There are 1140 practice questions for this topic.

CFA Practice Question

In 2015 Tollhouse Company incurred the following costs in designing and producing a new software product:

Completion of detailed program design: $15,000
Coding & testing costs incurred to establish a point of technological feasibility: $10,000
Coding & testing costs incurred beyond the point of technological feasibility: $44,000
Costs to produce master copies of software: $18,000
Copies of product software to be used in training: $25,000
Product packaging: $12,000

What amount should be capitalized on Tollhouse's 12/31/2015 balance sheet as software costs subject to amortization?
Correct Answer: $62,000

Per SFAS No. 86, costs related to producing master copies of the software product after the establishment of technological feasibility should be capitalized and amortized. This would include the coding and testing costs above. The last two costs listed would be part of inventory. $44,000 + $18,000 = $62,000

User Contributed Comments 20

User Comment
examinee What about product packaging and software in training? Shouldn't they be capitalized too?
jimmymh yea, shouldn't product packaging and software in training be capitalized?
fuller they should be included as inventory, not capitalized.
o123 surely training software isnt inventory...but I guess training as opposed to testing, is not capatalized.
Masterkang Man I have seen the question the third time, got it still wrong :-)

Costs AFTER Feasibility can be capitalized
bahodir In my opinion, Copies of product software to be used in training and Product packaging are expensed as incurred, but not capitalized. Since in later years the firm may need to produce other copies and package them, costs of which should be expensed in those years.
jmcarr02 What if the point of technological feasability wasn't met ?
freda I thought the option to capitalise development R&D is only available to those reporting using IFRS, not US GAAP?
AusPhD expense it baby
viannie freda: u are right but for software development including website development, it's an exception. check out the curriculum pages 363
cong this assumes GAPP not IFRS.
prajacti pls note that $25000 are not "training" expenses, but production expenses related to "software to be used in training" and hence inventory (production) costs
visiblebob How about some dates on this question to establish a proper timeline? No way would somebody put out a question with industry jargon like "master copy" and not supply dates with it to give the non-techies in the audience some idea of when a master copy might be made. I understand that it seems obvious, but adding dates to a question based on chronology also seems obvious to me.
bsm9 You can never ever capatilize training or related expenses.
Ifi2703 Freda - dont forget that under IFRS you only capitalise development costs (research costs are expensed)...and even then only under certain conditions. With US GAAP you expense everything except after the point of technological feasibility (with regards to software development). Although, with this question and as someone esle mentioned, training costs can be assumed to be an expense (for example the may need to train people each year and cannot keep capitalising these costs). That's the way i understand it anyway...
jonan203 note to self, production costs are a part of inventory.
vatsal92 Software Development costs are capitalized (IFRS and US GAAP), which involves costs related to producing master copies after the establishment of the point of technological feasibility. Whereas, costs to bring software to normal functioning are expensed.
robertdole Production costs are part of inventory because they relate to the dissemination of the actual good.
bryce_81 Isn't it optional to capitalize after the point of feasibility, but not required? They can expense it if they want, so I suppose we have to assume this company prefers to capitalize over expense?
bryce_81 The question should be what 'could' be capitalized
You need to log in first to add your comment.