B is corrent. Per ASC 985, the annual amortization of capitalized software costs shall be the greater of | | | | (1) | The ratio of the software’s current sales to its expected total sales, | | | | | | | | or | | | | | | | (2) | The straight-line method over the economic life of the product. |
In this case, the ratio of current to expected total sales is 10% (given). The annual straight-line rate is 25% per year (1/economic life of 4 years). The straight-line amortization should be used in year 2, since it is the higher of the two. The unamortized cost on the 12/31/Y2 balance sheet should, therefore, be 75% (100% − 25% amortization).A is incorrect. The ratio of sales to expected sales is not applied to net realizable value, but to the original capitalized cost.C is incorrect. Unamortized cost of software is not equivalent to its net realizable value (NRV). However, if unamortized cost is greater than NRV, cost is written down to NRV.D is incorrect. Annual amortization of capitalized software costs is the greater of Annual amortization of capitalized software costs is the greater of | | | | (1) | The ratio of the software’s current sales to its expected Total sales (10%), | | | | | | | | or | | | | | | | (2) | The straight-line method over the economic life of the product (25%). |
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