A company is developing a new, innovative software product. During the current year, it incurred the following costs related to this project: $150,000 for research activities to explore new algorithms, $200,000 for development activities to design and code the software after technological feasibility was established, and $50,000 for marketing research to assess market demand for the new product. How much of these costs should be capitalized according to U.S. GAAP?
- A$150,000
- B$0
- C$200,000
- D$400,000
Show answer & explanationAnswer & explanation
Correct answer: C. $200,000
According to U.S. GAAP (ASC 985-20, Costs of Software to Be Sold, Leased, or Marketed), costs incurred for research and development activities are generally expensed as incurred. However, for software development, costs incurred *after* technological feasibility has been established and *before* the product is available for general release are capitalized. Marketing research costs are always expensed as incurred. Therefore, only the $200,000 for development activities after technological feasibility was established should be capitalized.
Why the other options are wrong
- A. This incorrectly capitalizes research costs.
- B. This would be true if technological feasibility had not been established, but it was.
- D. This includes all costs, which is incorrect.
Software Development Costs
Under U.S. GAAP, costs to develop software for sale or lease are expensed until technological feasibility is established, then capitalized until the product is available for general release.
- Research costs are always expensed.
- Development costs after technological feasibility are capitalized.
- Post-release costs are expensed or capitalized based on specific criteria.
Memory trick: Feasibility's line divides expense from capital's climb.