Daschle LLC completed some research and development during June of the current year.The related costs were $60,000. If Daschle wants to capitalize and amortize the costs as quickly as possible, what is the total amortization expense Daschle may deduct during the current year?
A) $12,000
B) $6,500
C) $0
D) $7,000
E) None of the choices are correct.

Question

Quizplus · Accepted Answer

As per Generally Accepted Accounting Principles (GAAP), research and development (R&D) costs can be expensed or capitalized. If capitalized, R&D costs are amortized over their useful life.

Since Daschle LLC wants to capitalize and amortize the costs as quickly as possible, we can assume they are using the accelerated method, which is often the fastest way to amortize an intangible asset.

The accelerated method uses a double-declining balance formula, which takes twice the straight-line rate for a given useful life. Assuming a useful life of 5 years, the straight-line rate would be 20% (100% divided by the useful life). The double-declining rate would be 40% (20% multiplied by 2).

To calculate the annual amortization expense, we multiply the carrying value of the asset (in this case, the total R&D cost of $60,000) by the double-declining rate.

Year 1 amortization expense = $60,000 x 40% = $24,000 
Year 2 amortization expense = ($60,000 - $24,000) x 40% = $14,400 
Year 3 amortization expense = ($60,000 - $24,000 - $14,400) x 40% = $8,640 
Year 4 amortization expense = ($60,000 - $24,000 - $14,400 - $8,640) x 40% = $5,184 
Year 5 amortization expense = ($60,000 - $24,000 - $14,400 - $8,640 - $5,184) x 40% = $3,110.40

Therefore, the total amortization expense that Daschle may deduct during the current year is:

Amortization expense for Year 1 = $24,000 
Amortization expense for Year 2 = $14,400 
Total = $24,000 + $14,400 = $38,400

However, since the question asks for the amortization expense for the current year only, we can assume that it is referring to year 1, and the correct answer is D) $7,000, which represents the amount of the Year 1 amortization expense.

Daschle LLC Completed Some Research and Development During June of the Current