Reference no: EM132704661

You are the Controller for Specialty Cars, Incorporated. Specialty is an automotive company that specializes in the manufacture of high-end, unique vehicles designed by its customers. Due to the unique nature of Specialty's business, the company has decided to develop a software program internally to assist in streamlining the manufacturing process. Since each car is produced to meet an individual customer's specifications, the company incurs significant cost in the manufacturing of each vehicle. Specialty's goal is to design a software package that can identify similarities in design and allow the company to leverage existing resources in the manufacture of new vehicles.

• Specialty has never developed software internally before, and the CFO, Nathan Adams, has asked you to research the appropriate accounting treatment for the costs that will be incurred. Nathan would like to know exactly how the costs will impact the company's financial statements before the start of the project. You have put together a list of the items that you believe will be most useful in determining the classification of the costs. You intend to research the items on this list in order to illustrate what types of software qualify as internal user software, what costs can be capitalized, when capitalization can begin, subsequent accounting treatment and what happens if the project is terminated.
• Nathan would like you to create a memo (including all appropriate sections) addressed to him. The purpose of this memo is to convey your research findings (including Codification support) for the questions listed below to assist in the determination of the appropriate accounting treatment for the software development costs. You will address the following items in your memo.

For every item below you need to include a Codification reference to support your answer.

Question 1: Guidance provides some examples illustrating when computer software use does and does not qualify as "for internal use."

a. Give an example of when computer software qualifies for internal use.

b. Give an example of when computer software does not qualify for internal use.

Question 2: What steps are included in the Preliminary Project Stage?

Question 3: How shall costs incurred during the Preliminary Project Stage be accounted for?

Question 4: When does Capitalization of Cost begin?

Question 5: Can the following expenses be capitalized?

a. Airfare paid to fly one of the software developers out to a plant to observe operations and better determine how the software can meet the company's needs

b. Rent and other overhead (utilities, etc.) for the portion of the building being used to develop the software

c. Payroll for an employee that has been with the company for 5 years and was not hired for this project, but is transferred to the project to work on coding

d. Training for employees who will be using the software (training was started during the Application Development Stage)

e. Costs incurred to convert the company's data from the old system to the new

f. Interest on a loan taken out to directly finance the software development

Question 6: How should the software be amortized once it is completed and has been put in use?

Question 7: What is the appropriate accounting treatment if the company stops development of the software before it is complete? For example, say that Specialty is 25% complete with the project when a software firm specializing in automotive manufacturing releases a software package that does essentially everything that Specialty was developing internally. This software costs less than Specialty anticipates that it will spend to complete the development of its own software. Therefore, Specialty decides to terminate the project and purchase the software instead. What is the appropriate accounting for the costs that have already been capitalized and any costs incurred to terminate the project?