- CFA Exams
- CFA Exam: Level I 2021
- Study Session 8. Financial Reporting and Analysis (3)
- Reading 26. Long-lived Assets
- Subject 2. Intangible Assets
CFA Practice Question
There are 520 practice questions for this study session.
CFA Practice Question
On January 1, 2015, Liz-Beth Company capitalized a new word-processing software package that it had developed. The total cost recorded was $900,000 and the product is expected to generate revenue for three years. Revenues from sales of the software during 2015 were $6,000,000 and total expected revenues for the next three years are $15,000,000. What amount should Liz-Beth charge to amortization expense for the year ending on December 31, 2015 if the software is amortized based on revenues?
Correct Answer: C
The amount to be amortized is based upon the relative proportion of the revenues recognized during the current year compared to the total amount of estimated revenues. Therefore, the amount to be recognized would be $900,000 x ($6,000,000/$15,000,000) = $360,000.
User Contributed Comments 12
|yly14||similar to units used dep.|
|kasthala||But can the company capitalize an internally developed product?|
|Yurik74||Kasthala - guess it's not the question about whether it should be amortized, but about the size of amortization, since it's already capitalized, and amortization method is UOP (units of production), at least looks like it|
|CFunder||This can also be seen as an application of the matching principle.|
|boddunah||if technical feasibility is met . costs incurred after technical feasibility are capitalized
unless technical feasibility met , internally developed intangibles are expensed.
|Shaan23||Amortized based on REVENUE. Tricky. The last few words --- didnt read it...
Compare it the last example in AN where the use Amortize cost/ Useful life.....hard question
|Davidrh||Why isn't it amortized on the basis of total potential revenue of the intangible asset, i.e., $6m + $15m = $21m?
So: $900,000 x ($6,000,000/$21,000,000)
|isalya||Agree with David, should be 6/21|
|ange||Guys, the total is $15m for the next 3 years. The $15 already includes $6m of 2015. The question is correct.|
|sshetty2||awkward phrasing imo|
|denisw123||"next three years" implies after $900,000 was made.|
|kingirm||should be 21m|