CFA Practice Question

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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?

A. $0
B. $300,000
C. $360,000
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

User Comment
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
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