On January 1, 2018, Karen Company purchased a software package for running its production equipment for Php
Question:
On January 1, 2018, Karen Company purchased a software package for running its production equipment for Php 600,000 including refundable purchase tax of Php 50,000. The purchase price was financed by a loan of Php 605 000 (including Php 5,000 loan origination fees). The loan is guaranteed by the software license.
In January 2018, Karen Company incurred the following cost in customizing its software to make it more suitable for its operations:
- Labor - Php 120,000
- Depreciation of plant and equipment used to make the modifications: Php 15,000.
In January 2018, Karen Company production staff received training on how to operate the new software which includes the following:
- Cost of an expert external instructor: Php 7,000
- Labor - Php 3,000
In February 2018, Karen Company's production team tested the software and its information technology team made any additional modifications necessary to make the new software work as intended by management. The following costs were incurred in the testing phase:
- Material, net of Php 3,000 recovered from the sale of scrap production – Php 21,000
- Labor - Php 11,000
- Depreciation of plant and equipment while it was used to make the modifications: Php 5,000
The new software was ready for use on March 1, 2018. However, due to low initial order levels, the entity incurred a Php 23,000 loss on the operational software.
What is the cost of the software at initial recognition?
Financial Accounting
ISBN: 978-1259307959
4th edition
Authors: David Spiceland, Wayne Thomas, Don Herrmann