Dog Lovers of America (DLA) is a private company with a December 31^st fiscal year end. DLA is an online magazine for dog owners. The company was founded in September 2020 after the owners saw how many people adopted dogs during Covid-19. The magazine addresses training techniques, nutrition, pet supplies, etc. The online magazine sells 12 month magazine subscriptions and also has a daily blog.

In January 2022, DLAs management realized that a customer relationship management (CRM) database is necessary to help the business increase market share and meet customers needs. DLA management decided to purchase a license for software from another provider. The software license was purchased from McGees Technologies and permits DLA to use the software for 3 years beginning January 15, 2022. DLA is only permitted to use the software for internal purposes. DLA paid McGees Technologies $750,000 for the license on January 15, 2022.

DLA recorded the following journal entry as of January 2022

1/15/22

Prepaid Software Expense 750,000

Cash 750,000

The CFO of DLA, Ryan McQueen believes that the expense will be recognized evenly over the 3 year period that the company has the rights to use the software license. In other words, the company is planning on recording the following adjusting entry as of December 31, 2022.

12/31/22 Software Expense 250,000

Prepaid Software Expense 250,000

Ryan McQueen wants to be sure that the acquisition of the license was recorded correctly since it will have a material impact on the companys financial statements. This will assist in helping him to determine if the year end adjusting entry is also correct.

Accounting Issue: Did DLA recognize the $750,000 related to the CRM system correctly? If not, how should it have been recognized?

Your interpretation of the guidance: How should the $750,000 paid for the CRM system be recognized?

c. The amount of Software Expense for the CRM system that should be recognized in fiscal 2022 is:

a. $0

b. $250,000

c. $750,000