Question

Due date: 17 April 2019 Chancupi Limited, a large listed company, sells Tabs. The sales figures of the company have been dwindling in the past few years and during a meeting management came up with the idea of developing a web-site that would enable customers to order the company's products online, Since the company has never operated a website in the past, it was decided to first undertake a alternative products and suppliers and then select preferences. These steps were executed and are completely committed to the project, the company has sufficient resources to fund the roll instead of having to place an order by mail feasibility study and if successful, define hardware and software specifications, evaluate eventually expenses in the amount of Khs.510,000 were incurred in this regard. The directors out of the web-site, adequate technical and other resources are at their disposal and the expenditure attributable to the web-site can be measured reliably During the feasibility study it also came to light that the customers were very much in favour of the website and that sales were expected to increase by 15% as a result of the introduction of the web site. In the next stage of the project, hardware was purchased, a domain name was obtained and operating software was developed. These developed applications were installed on the web server and the total cost incurred with this stage amounted to Ksh 1,870,000 of which the obtaining the domain name, Once the above had been completed, the appearance of the web pages were designed to hardware comprised Ksh. 680,000, the softwareKsh.850,000 and the remainder was spent on ensure that it catches the eye immediately when logging on and that customers would find the layout very conducive to ordering the products of the company. A graphic designer rendered an The content of the web-site was then developed and this dealt with the products offered for access. The cost involved in this development amounted to Ksh.212,500 and this amount is still account of Ksh. 153,000 and this was paid in cash immediately. sale and other information in respect of the company that the users of the web site could outstanding, although management was completely satisfied with the work done by the consultant. The web site was taken into use on 1 July 2017 (year-end is 31 December 2017) and during the 6 months following it being commissioned, graphics was updated, the web site was registered with a few new search engines and the usage of the web site was analysed to establish its effectiveness thereof as a marketing tool. The costs amounted to Ksh.170,000. The useful life of the developed web-site was estimated at 3 years. On 31 December,a competitor introduced a web site with similar functionalities to the web-site of Bardagi Limited. Management estimated that the recoverable value of the web site as at 31 December 2018 was Ksh.600,000. The useful life of the web site remained unchanged. Required: (1) Determine the costs to be capitalized and those to be expensed relating to the web- site. Use the below format to determine the same. Cost Item Capitalised Expensed Ksh. Ksh. (2) Write up the appropriate journal entries to record the above for the periods ending 31 December 2017 and 2018. (narrations are not necessary) Total: 25 marks

Answer 1

1.) Cost item Capitalised     Expensed

Cost incurred in research (R&D) ksh 510,000

Cost of hardware ksh 680,000

Cost of software ksh 850,000

Cost of domain name ksh 340,000

Cost of graphic designer ksh 153,000

Cost of graphic updated ksh 170,000

Cost involved in development   ksh 212500

2.) JOURNAL ENTRIES

a.Research and development A/c 510,000

To bank A/c 510,000

b.Purchase of Hardware A/c 680,000

To cost incurred (bank) A/c 680,000

c.Purchase of Domain name  A/c 340,000

To cost incurred (bank) A/c 340,000

d.Operating Software developed A/c 850,000

To cost incurred (bank) A/c 850,000

e.Salary to graphic designer A/c 153,000

To Cash paid A/c 153,000

f.Content of website A/c 212,500

To Cost incurred(bank) A/c 212,500

g.Graphics updated A/c 170,000

To cost incurred A/c 170,000

h.Recoverable Amount A/c 600,000

To web site A/c 600,000