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Accounting for the Costs of Computer Software Developed

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Research the FASB Codification for Accounting for the costs of computer software developed or obtained for internal use using CheckPoint and FASB.org.

Answer the following questions:
1. What are the characteristics that define internal-use software?
2. Provide three examples of when computer software is for internal use.
3. What are the three stages of computer software development and provide
an activity which takes place in each stage?
4. What criteria must be met in order for capitalization of costs to begin?
5. What is one example of authorization?
6. Under what circumstances shall impairment be recognized?
7. When shall amortization begin and what method is used to amortize.
internal-use software?
8. If, after the development of internal-use software is completed, an entity
decides to market the software, how is it recorded?

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1. What are the characteristics that define internal-use software? (350-40-05-2)
Internal-use software has both of the following characteristics:
a. The software is acquired, internally developed, or modified solely, to meet the entity's internal needs.
b. During the software's development or modification, no substantive plan exists or is being developed to market the software externally.

2. Provide three examples of when computer software is for internal use.(350-40-05-6, paragraph 350-40-55-1 through 55-2)
a. A manufacturing entity purchases robots and customizes the software that the robots use to function. The robots are used in a manufacturing process that results in finished goods.
b. An entity develops software that helps it improve its cash management, which may allow the entity to earn more revenue.

c. An entity purchases software related to the installation of an online system used to keep membership data.
3. What are the three stages of computer software development and provide an activity which takes places in each stage? (350-40-05-7, paragraph 350-40-55-3)
a. Preliminary project stage-Conceptual formulation of alternatives
b. Application development ...

Solution Summary

The solution discusses accounting for the costs of computer software developed.

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Interidiate accounting research case

You are the Controller for Specialty Cars, Incorporated. Specialty is an automotive company that specializes in the manufacture of high-end, unique vehicles designed by its customers. Due to the unique nature of Specialty's business, the company has decided to develop a software program internally to assist in streamlining the manufacturing process. Since each car is produced to meet an individual customer's specifications, the company incurs significant cost in the manufacturing of each vehicle. Specialty's goal is to design a software package that can identify similarities in design and allow the company to leverage existing resources in the manufacture of new vehicles.
Specialty has never developed software internally before, and the CFO, Nathan Adams, has asked you to research the appropriate accounting treatment for the costs that will be incurred. Nathan would like to know exactly how the costs will impact the company's financial statements before the start of the project. You have put together a list of the items that you believe will be most useful in determining the classification of the costs. You intend to research the items on this list in order to illustrate what types of software qualify as internal user software, what costs can be capitalized, when capitalization can begin, subsequent accounting treatment and what happens if the project is terminated.
Nathan would like you to prepare a memo (including all appropriate sections) addressed to him. The purpose of this memo is to convey your research findings (including Codification support) for the questions listed below to assist in the determination of the appropriate accounting treatment for the software development costs. You will address the following items in your memo.
For every item below you need to include a Codification reference to support your answer.
1. Guidance provides some examples illustrating when computer software use does and does not qualify as "for internal use."
a. Give an example of when computer software qualifies for internal use.
b. Give an example of when computer software does not qualify for internal use.
2. What steps are included in the Preliminary Project Stage?
3. How shall costs incurred during the Preliminary Project Stage be accounted for?
4. When does Capitalization of Cost begin?
5. Can the following expenses be capitalized?
a. Airfare paid to fly one of the software developers out to a plant to observe operations and better determine how the software can meet the company's needs
b. Rent and other overhead (utilities, etc.) for the portion of the building being used to develop the software
c. Payroll for an employee that has been with the company for 5 years and was not hired for this project, but is transferred to the project to work on coding
d. Training for employees who will be using the software (training was started during the Application Development Stage)
e. Costs incurred to convert the company's data from the old system to the new
f. Interest on a loan taken out to directly finance the software development
6. How should the software be amortized once it is completed and has been put in use?
7. What is the appropriate accounting treatment if the company stops development of the software before it is complete? For example, say that Specialty is 25% complete with the project when a software firm specializing in automotive manufacturing releases a software package that does essentially everything that Specialty was developing internally. This software costs less than Specialty anticipates that it will spend to complete the development of its own software. Therefore, Specialty decides to terminate the project and purchase the software instead. What is the appropriate accounting for the costs that have already been capitalized and any costs incurred to terminate the project?

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