Answer to Question #297863 in Accounting for Yaku

Question

Question five:

As per IAS 38, Development costs can either qualify or not qualify for capitalization. Research and Expenditure are also part of Intangible Assets. J& Son is a manufacturing company that manufactures foldable plastic tables. It has engaged in some developments and below are the forecasted sales from 2017 to 2020 for the company.

2017 2018 2019 2020

Sales from Other Activities 500 700 800 800

Sales from Fold-up tables 0 500 700 900

Development Costs (600) 0 0 0

Required:

Show how the development costs should be treated if the cost qualify for capitalization, capitalizing it in line to sales. (NB: Amortize every year in relation to the sales each year)

Answer 1

From the above information, the development costs are to be capitalized as they meet the recognition criteria under IAS 38 as follows:

• J & Son has already completed the development, so it is assumed that the technical feasibility condition has been met.
• J & Son has already completed the development, so this condition has been met. 
• J & Son has been able to forecast sales for the subsequent period arising from the use of new developments, so it is assumed that the developmental costs have usefulness in the internal processes. 
• the “asset” has already been completed from the question. 
• the cost of the asset has already been given as 600.

Therefore, the development costs of 600, incurred in FY2017, will be capitalized and amortized as follows: