Consider the following two scenarios;

Scenario I: Over the 2005-2008 period, Micro Systems, Inc. spends \($10,000,000\) a year to develop patents on new computer hardware manufacturing technology. While some of its projects failed, the firm did develop several new patents each year during the period.

Scenario II: Over the 2005-2008 period, Macro Systems, Inc., a competitor of Micro Systems, Inc., paid \($10,000,000\) each year to acquire patent rights from other firms. The firm assigned a five-year useful life to all of the patents.

2. Each firm’s operating expenses (excluding the preceding patent-related information)
were \($140,000,000\), \($170,000,000\), \($205,000,000\), and \($245,000,000\), respectively, over the 2005-2008 period.
3. Assume that a 34% income tax rate applies to both firms.
Required:
1. How would the two firms account for their patent-related expenditure?
2. Calculate each firm's net income and net income as a percent of sales (that is, profit margin)
for the 2005-2008 period. Contrast the reported profitability of the two firms.
3. Assume that the firms continue to spend \($10,000,000\) per year in the way just described.
How would the comparability of their income statements be affected?