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)?

---

Definitions:

Ming Dynasty

A major Chinese dynasty that ruled between 1368 and 1644, known for its advancements in arts, literature, and monumental architecture.

Artistic Subject

The theme, concept, or object that an artist chooses to depict in their artwork.

Ming Court

Refers to the ruling establishment or royal court of the Ming dynasty, which governed China from 1368 to 1644.

Ideology

A system of ideas and ideals, especially one that forms the basis of economic or political theory and policy.