Question: In its Year 2 balance sheet IBM reported the following

In its Year 2 balance sheet, IBM reported the following account:

In the notes to its financial statements, IBM reported that it spent $2,997 million on computer software–related activities. Assume that these expenditures were related to projects in which technological feasibility has been proved.

1. How is IBM required to account for computer software–related expenditures?
2. As of the end of Year 2, how much has IBM spent on existing computer software–related activities in past years?
3. As of the end of Year 2, how much of its computer software–related expenditures has IBM capitalized?
4. Based on the information given, estimate IBM’s amortization of computer software costs in Year 2.
5. Assume that IBM amortizes its capitalized software costs using the straight-line method. Estimate the average useful life of the software products developed as of the end of Year 2.
6. How might firms use the accounting for computer software costs to manage their earnings?

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