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ACCA Applied Knowledge · Financial Accounting · Intangible non-current assets and amortisation

Kappa Co capitalised development costs of $240,000 on 1 January 20X4. Production began on 1 January 20X5 and the product is expected to generate benefits for 5 years from that date, with no residual value. On 1 January 20X6 Kappa's accounts showed the project's costs were still correctly stated. Kappa also spent $30,000 on a separate research project in 20X5 and incorrectly capitalised it as part of this development asset in the 31 December 20X5 figures, giving a recorded cost of $270,000. What is the correct carrying amount of the intangible asset at 31 December 20X5 after correcting the error?

The carrying amount is $192,000. After removing the $30,000 research cost, the asset cost is $240,000, amortised over five years from the start of production at $48,000 a year, so one year's amortisation leaves $192,000.

  1. A$192,000Correct
  2. B$216,000
  3. C$240,000
  4. D$270,000

Explanation

Amortisation starts when the asset is available for use, 1 January 20X5. Correct cost is $240,000 after removing the $30,000 research. Annual amortisation = 240,000/5 = $48,000. Carrying amount at 31 December 20X5 = 240,000 - 48,000 = $192,000. $216,000 would result from amortising for the wrong base ($270,000/5 = 54,000) after removing research only from cost: 270,000-54,000; $240,000 ignores amortisation.

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