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Hi Mike
Please enlightened me. Many ThanksA company had $20 million of capitalised development expenditure at cost brought forward at 1 Oct 2007 in respect of products currently in production and a new project began on the same date.
The research stage of the new project lasted until 31Dec2007 and incurred $1.4 million of costs. From that date the project incurred development cost of $800,000 per month. On 1 April 2008 the directors became confident that the project would be successful and yield a profit well in excess of costs. The project was still in development at 30 September 2008. Capitalised development expenditure is amortised at 20% per annum using the straight line method.
What amount will be charged to profit or loss for the year ended 30 September 2008 in respect of research and development costs?
Ans: $7,800,000
My working:
1/10/x7 b/f $20m
31/12/x7 Research $1.4m & Development cost $0.8m/mth
1/4/x8 project success
30/9/x8 project ongoing
1/12/x7-30/3/x8 $1.4m + (0.8 x 4mths) = $4.6
Amortised: ($20 x 20% x 11/12mth) + ($1.4+4.6 x 20% x 4/12) = $4.1
My answer:$4.1+4.6=$8.7“1/12/x7-30/3/x8 $1.4m + (0.8 x 4mths) = $4.6”
Why 1/12/x7?
So 3 months, not four (use your fingers!)
Research and development up to 31 March, 2008 is therefore $1.4m + $2.4m = $3.6m
“Amortised: ($20 x 20% x 11/12mth) + ($1.4+4.6 x 20% x 4/12) = $4.1”
Oh! What a tangled web!
$20m x 20% = $4m – agreed
But what’s 11/12? 1 October, 2007 to 30 September, 2008 is 12 months
“($1.4+4.6 x 20% x 4/12)” – 3 mistakes here
1) You see that figure of yours $4.6m? Do you agree that that INCLUDES the $1.4m already? So your line “($1.4+4.6 x 20% x 4/12)” is double counting the $1.4m
2) Surely your WRONG figure is already time apportioned – $1.4m up to 31 December, 2007 plus $2.4m from 31 December, 2007 to 1 April,2008 = $3.8 for the period from 1 October to 31 March so no need for any time apportionment
3) Where’s 4/12 coming from anyway? There’s not a single 4 month period identified in the question!
“30/9/x8 project ongoing” – therefore expenditure on the project is still being incurred so this project’s capitalised values are NOT being amortised.
Amortisation starts on the date the project is launched into the market and starts to earn revenues
Amounts charged to statement of profit or loss are therefore:
up to 31 December, 2007 $1.4
1 January, 2008 to 31 March, 2008 (3 x $.8m) $2.4m
(1. 4. 2008 to 30. 9. 2008 development capitalised 6 x $.8m = $4.8m and not amortised)
amortisation of b / fwd development costs at 20% straight line ($20m x 20%) $4mtotal expense charged to statement of profit or loss is therefore:
$1.4m + $2.4m + $4m = $7.8m
OK?
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