Answered: theinformationprovided,whendosuccessful…

Intermediate Accounting: Reporting And Analysis

3rd Edition

ISBN:9781337788281

Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Publisher:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Chapter4: The Balance Sheet And The Statement Of Shareholders' Equity

Section: Chapter Questions

Problem 7RE

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Trimax Solutions develops software to support e-commerce. Trimax incurs substantial computer software development costs as well as substantial research and development (R&D) costs related to other aspects of its product line. Under GAAP, if certain conditions are met, Trimax capitalizes software development costs but expenses the other R&D costs. The following information is taken from Trimax’s annual reports ($ in thousands): R&Dcosts....................... Netincome....................... Totalassets(atyear-end) ........... Equity(atyear-end)................ Capitalized software costs Unamortized balance (at year-end) . . Amortization expense . . . . . . . . . . . . Required: 1999 $ 400 312 3,368 2,212 20 4 2000 $ 491 367 3,455 2,460 31 7 2001 $ 216 388 3,901 2,612 2002 $ 212 206 4,012 2,809 2003 $ 355 55 4,045 2,889 31 13 2004 $ 419 81 4,077 2,915 42 15 2005 $ 401 167 4,335 3,146 43 15 2006 $ 455 179 4,650 3,312 36 14 27 22 9 12 CHECK (a) Year2006,$7 CHECK (e) (2)ROE,6.6% PROBLEM 4–6 Alternative Depreciation Methods CHECK Year 1 net income ($000s), SL: $650, DDB: $550, SYD: $568.2 PROBLEM 4–7 Analyzing Depreciation for Rates of Return CHECK Year 2 return, SL: 12.5%, SYD: 7.5% a. Compute the total expenditures for software development costs for each year. b. R&Dcostsareexpensedasincurred.CompareandcontrastcomputersoftwaredevelopmentcostswiththeR&D costs and discuss the rationale for expensing R&D costs but capitalizing some software development costs. c. Based on theinformationprovided,whendosuccessfulresearcheffortsappeartoproduceincomeforTrimax? d. DiscusshowincomeandequityareaffectedifTrimaxinvestsmoreinsoftwaredevelopmentversusR&Dprojects (focus your response on the accounting, and not economic, implications). e. Compute net income, return on assets, and return on equity for year 2006 while separately assuming (1) soft- ware development costs are expensed as incurred and (2) R&D costs are capitalized and amortized using straight line over the following four years. f. DiscusshowthetwoaccountingalternativesinewouldaffectcashflowfromoperationsforTrimax.

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