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Hi Mike!
I have an issue with the following question.
Amco Co carries out research and development. In the year ended 30 June 20X5, Amco
incurred costs in relation to project X of $750,000. These were incurred at the same
amount each month up to 30 April 20X5, when the project was completed. The product
produced by the project went on sale from 31 May 20X5
The project had been confirmed as feasible on 1 January 20X5, and the product produced
by the project was expected to have a useful life of five years.
What is the carrying amount of the development expenditure asset as at 30 June 20X5?1.The answer is $295,000
2. In answer, depreciation is charged for only one month saying that the project went on sale from 31 May 20X5.3.My issue is that why only one month of depreciation and not 2 month? On 30 April 20×5, the project was completed and on 31 May it went on sales. Therefore between 2 dates, commercial production has begin. And the IAS says that amortisation starts when commercial production begin. Therefore 2 month of amortisation should be charged.
4.Could you locate where I am getting thing wrong?Thanks for your time.
“Therefore between 2 dates, commercial production has begin”
Where have you got that piece of information from? It’s certainly not in the information that you have typed
Do you have a problem accepting that production is made and sold within the same day?
In addition, you haven’t told me on what date the company started this project so I have no idea how much of the $750,000 should be deferred
!!!
“Therefore between 2 dates, commercial production has begin”.
-That my understanding of the scenario. I have assumed that on 1 May commercial production has started and it’s on the 31 May that they started selling.
-But from your reply, I should have assumed that on 31 May, both production and selling have taken place.-However what’s wrong with my understanding?
Your understanding could be correct – but you’re making assumptions that are not hinted at in the question
Why did you not also assume that, when they started selling, the company realised that the market tastes had moved on since the feasibility study that was carried out and that the product could only be sold for a 10% margin instead of the 23% that was assumed.
However, a recent change in French law has meant that the competition from across the water is having to decide whether to continue production but that would involve them in a major capital outlay and at present it looks like the French competition is going to cease to produce completely
Now whilst this may be good news for our company, the strength of the Euro cannot be relied upon to be maintained so exporting to the Eurozone will not always be as attractive as it is at the moment
Furthermore, the chief engineer that was so closely involved in product development has indicated that he is leaving to join a rival company. It looks like we may be able to persuade him to stay so long as we put his wife on the payroll. She doesn’t work for us, and probably never will, but we have agreed in principle to put his wife on the payroll and pay her $4,000 per month.
This additional expense needs to be considered when we are deciding whether to go ahead with this new product of ours
Why have you not assumed any of those points?
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