[cpa1988]

Can someone please explain what is happening here?

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