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Hi sir Mike,
The last one.
q. 4 of the pilot paper (MCQ)
Dempsey;s year end is 30/9/14. Demsey commemced the development of a project to produce a new pharmaceutical drug on 1 /1/2014. Expenditure per month of $ 40000 were incurred untill the project was completed on 30/6/2014, when the drug went into immediate production. The directors became confident of the project’s success on 1/3/2014. The drug has an estimated life span of 5 yrs, time apportionment is used by demsey where applicable.
Q. what amount will Demsey charge to profit or loss for development cost, including any amortisation for the year ended 30/9/2014my solution:
40000*2=80000-development expenditure to expense
40000*4=160000/5=32000*4/12=10667
therefore total charge to P&L= 80000+10667=$90667But solution given in the speciment answer:
40000*2=80000
40000*4/5*3/12=8000
=80000+8000=88000
My point is development cost has been capitalized for 4 months ie march to june but in time apportioning depreciation there have use only 3 months, why?
Thanks. this could be the 2 marks that will give me that pass which i dearly need.There are three different time periods involved and you have used only two! First there’s the two months at 40,000 January and February = 80,000
Then there’s the four months March through to June at 40,000 = 160,000
Divide by 5 gives annual depreciation of 32,000 (I know that you’re ok with this so far)
Then finally there’s the three months of production July, August and September – so 3/12 x 32,000 gives an 8,000 amortisation
Ok now?
Thank you sir,
I now see the point. production actually started on the 30 of june.
I will pass this paper in this sitting.
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