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Hi Sir, I don’t get it why some of the development cost can be expensed to SOPL. This question is extracted from BPP Revision Kit Q38.
A company had $20M of capitalised development expenditure at cost b/f at 1 Oct 20X7 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 31 Dec 20X7 and incurred $1.4M of costs. From that date the project incurred development cost of $800k per month. On 1 Apr 20X8 the Director become confident that the project would be successful & yield a profit well in excess of costs. The project was still in development at 30 Sept 20X8. Capitalised development expenditure is amortised at 20% per annum using straight line method.
What amount will be charged to SOPL for year ended 30 Sept 20X8 in respect of R&D costs?
The answer given is:
research costs – $1.4M
expensed development (800kx3) – $2.4M
depreciation on capitalised amount b/f (20Mx20%) – $4M
Total R&D costs: $7.8MIsn’t development cost supposed to be capitalised instead of expensed to SOPL? Also, what does it mean when it says ‘on 1 Apr, director is confident that project would be succesful’? Does it mean the project actually ended on 1 Apr and that’s why we take $800k x 3 months?
Thank you for taking your time to read this, would be very grateful if you can clear my doubt.
“‘on 1 Apr, director is confident that project would be succesful’? ”
There are a number of criteria to be satisfied before development costs become capitalisable
Look at the top half of page 142 in the free course notes and you’ll see those criteria listed out in an easily remembered mnemonic
Environmentally satisfactory and technical feasibility are both necessary pre-conditions before development costs should be capitalised and, until we reach that stage, development costs should be expensed through statement of profit or loss
“Does it mean the project actually ended on 1 Apr and that’s why we take $800k x 3 months?”
No! The question tells you that “The project was still in development at 30 Sept 20X8”
It means that with effect from 1 April 20X8 all development costs should now be capitalised because the necessary criteria have now been satisfied
Is that better?
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