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Question 51:
Dempsey’s year end is 30 Sep 20X4. Dempsey commenced the development stage of a project to produce a new pharmaceutical drug on 1 Jan 20X4. Expenditure of $40,000 per month was incurred until the project was completed on 30 Jun 20X4 when the drug went into immediate production. The directors became confident of the project’s success on 1 Mar 20X4. The drug has an estimated life span of 5 years; time apportionment is used by Dempsey where applicable.
What amount will Dempsey charge to profit or loss for development costs, including any amortisation, for the year ended 30 Sep 20X4?
BPP’s answer:
$88,000
Expenses 1 January to 1 March (40,000 x 2) $80,000
4 months capitalised and amortised
((40,000 x 4) / 5 years x 3/12) $8,000$80,000 + $8,000 = $88,000
My problem:
I cannot understand why he accounted for 3 months and not 4 months at the end of the working.
I think this is why:
Expenses 1 January to 1 March (40,000 x 2) $80,000
4 months capitalised and amortised
((40,000 x 4) / 5 years x 3/12) $8,0001 March to 30th June
40000 x 4 = 160000 is capitalisedCan only amortise when production begins = 30 Jun 20X4 – 30 Sept 20X4 = 3 months amortisation.
160000/5 years x 3/12 months = £8000
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