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 (S in thousands):

Required :

a. Compute the total expenditures for software development costs for each year.

b. R&D costs are expensed as incurred. Compare and contrast computer software development costs with the R&D costs and discuss the rationale for expensing R&D costs but capitalizing some software development costs.

c. Based on the information provided when do successful research efforts appear to produce income for Trimax?

d. Discuss how income and equity are affected if Trimax invests more in software development versus R&D projects (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) Software development costs are expensed as incurred.

(2) R&D costs are capitalized and amortized using straight line over the following four years.

f. Discuss how the two accounting alternatives in e would affect cash flow from operations for Trimax.

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R&D costs Net income Total assets (at year-end) Equity (at year-end) Capitalized software costs Unamortized balance (at year- end) Amortization expense 1999 2000 2001 2002 2003 2004 2005 2006 $400 $ 491 $216 $212 $355 $ 419 $ 401 $ 455 312 367 388 206 55 81 167 179 3,368 3,455 3,901 4,012 4,045 4,077 4,335 4,650 2,212 2,460 2,612 2,809 2,889 2,915 3,146 3,312 20 31 27 22 31 42 43 7 9 12 36 13 15 15 14 R&D costs Net income Total assets (at year-end) Equity (at year-end) Capitalized software costs Unamortized balance (at year- end) Amortization expense 1999 2000 2001 2002 2003 2004 2005 2006 $400 $ 491 $216 $212 $355 $ 419 $ 401 $ 455 312 367 388 206 55 81 167 179 3,368 3,455 3,901 4,012 4,045 4,077 4,335 4,650 2,212 2,460 2,612 2,809 2,889 2,915 3,146 3,312 20 31 27 22 31 42 43 7 9 12 36 13 15 15 14

Answer rating: 100% (QA)

Expensing Vs Capitalizing shows the way how any cost is treated on the financial records of the company Expensing means that cost incurred are recorded in the income statement in order to calculate th... View the full answer