Appendix II: Memo from research and development (R&D) department MEMO To: Michael From: R&D department RE: Development costs during Year 2, Year 3, and Year 4 Below is a list of the development costs incurred during Year 2 to Year 4. In discussions with the accounting department, included below those costs are the costs that meet the criteria for capitalization during each of the years. Year 2 Year 3 Year 4 Total development costs expensed in the year in R&D expenses $650,000 $730,000 $760,000 Total amount included above that qualifies for capitalization $420,000 $600,000 $720,000 The development costs should be amortized over a three-year period, with one-half of the annual amortization being recognized in the year of capitalization. This amortization policy is specific to our internally generated intangible assets