Question 2 Companies can capitalize software development costs when the product is "technologically feasible". Some companies never capitalize their software costs - for example, Microsoft. Pederics, a software development company capitalizes those software costs allowed under GAAP. The following information is taken from its financial statements. Capitalized software costs Unamortized balance Amortized expense m - million 2013 $ 40m 10m 2014 $ 50m 15m 2015 $ 63m 17m 2016 $ 96m 27m Required: (a) If Pederics had not capitalized its software costs but expensed them instead what would they have reported as software expense each year from 2013 to 2016, assuming that unamortized balance of software costs was $35 million at the end of 2012? (8 marks) (b) What is the likely effect upon net income variability of expensing rather than capitalizing software development costs? (4 marks) (c) How might income be manipulated under either of these two methods (expensing and capitalizing)? (8 marks)