Equilibrium Company plans to spend \(\$ 30,000\) at the beginning of each of the next several years advertising the Company's brand names and trademarks. As a result of the advertising expenditure for a given year, aftertax income (not counting advertising expense) is expected to increase by \(\$ 12,000\) a year for 3 years, including the year of the expenditure itself. Equilibrium Company has other aftertax income of \(\$ 10,000\) per year. The controller of Equilibrium Company wonders what the effect on the financial statements will be of following one of two accounting policies with respect to advertising expenditures:

(1) Expensing the advertising costs in the year of expenditures.
(2) Capitalizing the advertising costs and amortizing them over 3 years, including the year of the expenditure itself.
Assume that the Company does spend \(\$ 30,000\) at the beginning of each of 4 years and that the planned increase in income occurs. Ignore income tax effects.
a Prepare a 4 -year condensed summary of net income assuming that policy (1) is followed and advertising costs are expensed as incurred.
b Prepare a 4 -year condensed summary of net income assuming that policy (2) is followed and advertising costs are capitalized and amortized over 3 years. Compute also the amount of Deferred Advertising Costs (asset) to be shown on the balance sheet at the end of each of the four years.
c In what sense is policy (1) a conservative policy?
d What will be the effect on net income and on the balance sheet if Equilibrium Company continues to spend \(\$ 30,000\) each year and the effects on aftertax income continue as in the first 4 years?