Companies Can Capitalize Software Development Costs When the Product Is

question 61

Essay

Companies can capitalize software development costs when the product is "technologically feasible". Some companies never capitalize their software costs - for example, Microsoft.

Viderics, a software development company capitalizes those software costs allowed under GAAP. The following information is taken from its financial statements.
$$\begin{array} { l c c c c } & \text { X1 } & \text { X2 } & \text { X3 } & \text { X4 } \\\text { Capitalized software costs (in millions): }\\\text { Unamortized balance } & \$ 40 & \$ 50 & \$ 63 & \$ 96 \\\text { Amortized balance } & \$ 10 & \$ 15 & \$ 17 & \$ 27\end{array}$$
a. If Viderics had not capitalized its software costs but expensed them instead what would they have reported as software expense each year, assuming unamortized balance of software costs was $35 in year X0?
b. What is the likely effect upon net income variability of expensing rather than capitalizing software development costs?
c. How might income be manipulated under either of these two methods (expensing and capitalizing)?

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