ExpertMedium2 marksMultiple Choice
ACCA · Question 16 · Intangible Assets
SECTION B - CASE 1: AeroTech Drones
AeroTech Drones Co manufactures specialized agricultural drones. The year-end is 31 December 20X5.
During 20X5, AeroTech incurred the following costs on a new drone project ('AgriFly'):
- 1 Jan to 30 Jun: $400,000 on initial research and feasibility studies.
- 1 Jul to 31 Oct: $600,000 on development. Commercial viability and technical feasibility were established on 1 July.
- 1 Nov to 31 Dec: $200,000 on final testing and production setup.
The AgriFly drone was ready for use on 31 December 20X5.
Under IAS 38 Intangible Assets, what amount should be capitalized as an intangible asset for the AgriFly project in the year ended 31 December 20X5?
SECTION B - CASE 1: AeroTech Drones
AeroTech Drones Co manufactures specialized agricultural drones. The year-end is 31 December 20X5.
During 20X5, AeroTech incurred the following costs on a new drone project ('AgriFly'):
- 1 Jan to 30 Jun: $400,000 on initial research and feasibility studies.
- 1 Jul to 31 Oct: $600,000 on development. Commercial viability and technical feasibility were established on 1 July.
- 1 Nov to 31 Dec: $200,000 on final testing and production setup.
The AgriFly drone was ready for use on 31 December 20X5.
Under IAS 38 Intangible Assets, what amount should be capitalized as an intangible asset for the AgriFly project in the year ended 31 December 20X5?
Answer options:
A.
$600,000
B.
$800,000
C.
$1,000,000
D.
$1,200,000
How to approach this question
Identify the date when the capitalization criteria (PIRATE) were met. Capitalize all directly attributable development costs incurred from that date until the asset is ready for use. Expense all prior costs.
Full Answer
B.$800,000✓ Correct
Under IAS 38, research costs ($400,000) must be expensed to profit or loss. Development costs are capitalized only after the recognition criteria are met (1 July). Costs incurred from 1 July to 31 December ($600,000 + $200,000 = $800,000) are capitalized as an intangible asset.
Common mistakes
Capitalizing research costs, or failing to capitalize the final testing costs.
Practice the full ACCA FR — Financial Reporting Practice Exam 1
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