Capitalized Development Costs

You can use the example in your notebook as a reference

Consider a hypothetical scenario where you are an accountant at a corporation, known as Corporation Z. This corporation has been engaged in the development of a new product for a particular client.

In the first year, the company spent a significant amount on product development costs. Some of these costs were incurred at the point of demonstrating the product's technical feasibility and meeting other recognition criteria.

In the following year, Corporation Z incurred additional costs associated with the product's development. The product was officially available for sale at the beginning of the third year, and the first batch was shipped to the customer later that same year. The company anticipates that the product sales will continue for several years until a replacement product is developed.

Over the entire economic life of the product, a certain number of units are expected to be produced. The number of units manufactured in the third year is a significant proportion of this total. Assume that the product's residual value is zero.

Your assignment is to:

1-Calculate the amount of development cost that Corporation Z should capitalize in the first, second, and third years.

2-Compute the amount of amortization that should be recognized in the third year.

In your calculations, consider the costs incurred at the point of technical feasibility, additional costs in the second year, and the estimated total production volume. Remember, this scenario doesn't provide you with exact figures but asks you to demonstrate your understanding of the principles involved.

Outline the steps you would take to calculate these amounts, explaining your reasoning and any assumptions you make along the way. Use hypothetical numbers if necessary to illustrate your approach.