Microsoft, Incorporated, is one of the largest producers of software for personal computers. Special rules apply to accounting for the costs of developing software for sale or lease. Companies expense such costs until the technological feasibility of the product is established. Thereafter, they should capitalize these costs and amortize them over the life of the product. One of Microsoft’s divisions began working on some special business applications software. Suppose the division had spent $900,000 on the project by the end of 20X7, but it was not yet clear whether the software was technologically feasible.
On July 1, 20X8, after spending another $400,000, management decided that the software was technologically feasible. During the second half of 20X8, the division spent another $2 million on this project. In December 20X8, the company announced the product, with deliveries to begin in March 20X9. The division incurred no R&D costs for the software after December 20X8.
1. Prepare journal entries to account for the R&D expenses for the software for 20X7 and 20X8. Assume that the division paid all expenditures in cash.
2. Would any R&D expenses affect income in 20X9?