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Hello sir Mike,
Is yet another time for so much questions. kindly help me understand this question.
Dempsey commenced the development stage of a project to produce a new pharmaceutical drug on 1 January 2014.Expenditure of $40,000 per month was incurred until the project was completed on 30 June 2014 when the drug went into immediate production.
The directors became confident of the project’s success on 1 March 2014. The drug has an estimated life span of five 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 September 2014?
thanks
January and February x $40,000 straight to profit or loss (directors not yet certain commercially viable)
March, April, May and June x $40,000 capitalise (directors now happy about commercial viability)
Amortise for July, August and September
$160,000 over 5 years is $32,000 per annum and for 3 months is $8,000
So total going to profit or loss should be $80,000 + $8,000 = $88,000
Ok?
Sir.
one more thing,
If the directors are happy about the commercial viability, but development is still ongoing, can we still capitalized by the end of the reporting period?That’s precisely what the IAS is issued for – yes, even though we are still in development stage, so long as all the criteria boxes are ticked, not only can we capitalise, we MUST capitalise
Hello Mike,
Would you be so kind to tell me, why in the statement ended on September we include amortisatization for only 3 months? As I understand we have 80 000 to be expensed, then, when the owners became confident that the project is a success, we are going to capitalise all the following development expenses, so we have March to September (which gives [160 000 / 5 * 7/12].
If I am wrong and we start to include amortization only after the project is done, then what happens in the period between March and June? As far as I know we are allowed to capitalize and amortize development expenses after we get enough evidence we will make a use of it in the future. Thank you in advance for your reply!
Arthur
“As far as I know we are allowed to capitalize and amortize development expenses after we get enough evidence we will make a use of it in the future” – point number 1 – we are not ALLOWED to capitalise! We MUST capitalise
“became confident that the project is a success, we are going to capitalise all the following development expenses, so we have March to September” – we are no longer developing after June – we’re now in production so the $40,000 per month expenditure ceased on 30 June
January and February – write off as research expense in statement of profit or loss
March, April, May and June – capitalise because directors are happy about viability
July, go into production so now amortise
Produce for 3 months (July, August and September) so amortise for 3 months
Better?
Yes, thank you!
As I have understood, the start point for amortizing is the start of production process (not earlier), but before the production has started we keep capitalizing (as long as owners believe in project`s viability).
Arthur
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