Impact of capitalizing and amortizing versus expensing when incurred. West Company, a U.S. company, and East Company, a Japanese company, incur $100 million of research and development (R&D) costs each year. West Company must expense these costs immediately, whereas East Company capitalizes the costs and amortizes them over five years.

a. For each of the first six years, compute the amount of R&D expense that each firm would report on the income statement and the amount of deferred R&D costs that each firm would report on the balance sheet.

b. For this part, assume that the amount of R&D costs incurred by each firm increases by $20 million each year. Repeat part a.

c. Comment on the differences noted in parts a and b.(Appendix)