TEST XQ's Software Development Division (SDD) has developed several architectural design software packages. One software package that they have developed is being sold to English Company for $250,000 or 325,000 pounds. The cost of developing the software was $195,000. As payment, XQ has accepted a note receivable that is due in 5 years.
SDD has also developed a second software package. They incurred development costs of $410,000. They are trading this software package in exchange for a small office building. The fair market value of this building is $600,000.
In an Excel spreadsheet, make the accounting entry on XQ's books for each software sale. Include 1–3 paragraphs discussing the accounting issues involved for each sale.
Use $235,000 as the discounted value of the note receivable.
Accounting entry for the sale of the first software package:
Debit: Note Receivable ($235,000)
Credit: Software Development Revenue ($250,000)
Explanation: The software package developed by XQ's Software Development Division (SDD) is being sold to an English Company for $250,000. As payment, XQ has accepted a note receivable that is due in 5 years. The fair value of the note receivable is $235,000, which is the present value of the future cash flows using an appropriate discount rate. The difference between the fair value of the note receivable and the sale price of the software package represents the interest charged on the note receivable.
Accounting entry for the exchange of the second software package:
Debit: Software Development Expense ($410,000)
Credit: Building ($600,000)
Explanation: SDD has developed a second software package and is trading it in exchange for a small office building. The development costs incurred for the software package amount to $410,000. The fair market value of the building being received in exchange is $600,000. In this case, the accounting entry reflects the transfer of the software development expenses to the building, which represents the fair value of the exchange transaction.
In both cases, recognizing the revenue and expenses associated with the software development and sale involve determining the fair value of the consideration received or exchanged. This requires estimating the fair value of the note receivable and the fair market value of the building in the respective transactions. Additionally, any interest or financial charges related to the note receivable need to be calculated and recorded as appropriate.
To make the accounting entries for each software sale on XQ's books, we need to consider the accounting issues involved for each sale.
1. Sale of software package for $250,000 or £325,000:
- Debit: Notes Receivable ($235,000) - this represents the discounted value of the note receivable.
- Credit: Sales Revenue ($250,000) - this records the revenue generated from the sale.
- Credit: Gain on Disposal of Software (plug) - this account is used to balance the entry. The gain is the difference between the sales price and the cost of developing the software ($250,000 - $195,000 = $55,000).
The accounting issue involved in this sale is recognizing revenue from the sale of software. Revenue should be recognized when it is realized or realizable and earned. In this case, the payment is in the form of a note receivable, due in 5 years. To properly recognize revenue, we need to discount the note receivable to its present value using an appropriate interest rate and record it as the actual amount receivable ($235,000). The gain on disposal represents the profit earned from the sale.
2. Trade of software package for a small office building:
- Debit: Software Development Costs ($410,000) - this account represents the cost of developing the software.
- Credit: Fixed Assets (Office Building) ($600,000) - this reflects the fair market value of the office building.
The accounting issue involved in this trade is valuing the software package and the office building exchanged. The software package's value is derived from the development costs incurred ($410,000), while the office building's value is based on the fair market value ($600,000). By recording these values, the accounting entry reflects the exchange of assets between XQ and the English Company.
It is important to note that the specific accounting treatment for these transactions may vary depending on the applicable accounting standards and XQ's accounting policies. It is recommended to consult with an accounting professional or refer to XQ's financial reporting framework for accurate and compliant financial reporting.