EXERCISE 4–1 Trimax Solutions develops software to support e-commerce. Trimax incurs substantial computer software development costs as well as substantial research and development (R&D) costs related to other aspects of its product line. Under GAAP, if certain conditions are met, Trimax capitalizes software development costs but expenses the other R&D costs. The following information is taken from Trimax’s annual reports ($ in thousands):

1999 2000 2001 2002 2003 2004 2005 2006 R&D costs............................................... $ 400 $ 491 $ 216 $ 212 $ 355 $ 419 $ 401 $ 455 Net income.............................................. 312 367 388 206 55 81 167 179 Total assets (at year-end) ....................... 3,368 3,455 3,901 4,012 4,045 4,077 4,335 4,650 Equity (at year-end) ................................ 2,212 2,460 2,612 2,809 2,889 2,915 3,146 3,312 Capitalized software costs Unamortized balance (at year-end) .... 20 31 27 22 31 42 43 36 Amortization expense ......................... 4 7 9 12 13 15 15 14 Required:

a. Compute the total expenditures for software development costs for each year.

b. R&D costs are expensed as incurred. Compare and contrast computer software development costs with the R&D costs and discuss the rationale for expensing R&D costs but capitalizing some software development costs.

c. Based on the information provided, when do successful research efforts appear to produce income for Trimax?

d. Discuss how income and equity are affected if Trimax invests more in software development versus R&D projects

(focus your response on the accounting, and not economic, implications).

e. Compute net income, return on assets, and return on equity for year 2006 while separately assuming (1) Software development costs are expensed as incurred and (2) R&D costs are capitalized and amortized using straight line over the following four years.

f. Discuss how the two accounting alternatives in e would affect cash flow from operations for Trimax.