Expensing versus capitalizing research and development costs. Pfizer, a pharmaceutical company, plans to spend $\$ 90$ million on research and development (R\&D) at the beginning of each of the next several years to develop new drugs. As a result of the R\&D expenditure for a given year, it expects after-tax income (not counting R\&D expense) to increase by $\$ 36$ million a year for three years, including the year of the expenditure itself. Pfizer has other after-tax income of $\$ 30$ million per year. The controller of Pfizer is curious about the effect on the financial statements of following one of two accounting policies with respect to R\&D expenditures:

(1) Expensing the R\&D costs in the year of expenditure (the policy required in the United States)
(2) Capitalizing the R\&D costs and amortizing them over three years, including the year of the expenditure itself (the policy allowed in certain other countries)
Assume that the company does spend $\$ 90$ million at the beginning of each of four years and that the planned increase in income occurs. Ignore income tax effects.

a. Prepare a four-year condensed summary of net income, assuming that Pfizer follows policy (1) and expenses R\&D costs as incurred.

b. Prepare a four-year condensed summary of net income, assuming that Pfizer follows policy (2) and capitalizes R\&D costs, then amortizes them over three years. Also compute the amount of Deferred R\&D Costs (asset) appearing on the balance sheet at the end of each of the four years.

c. In what sense is policy (1) a conservative policy?

d. Ascertain the effect on net income and on the balance sheet if Pfizer continues to spend $\$ 90$ million each year and the after-tax income effects continue as in the first four years.