Diva Limited is the parent company of a group of global subsidiaries that specializes in the design, production anddistribution of apparel and accessories for extreme sports. The extreme sports industry is defined by youth culture, youthsaged 12 to 24, and is forecasted to grow at a rate of 15% to 18% annually. The industry is made up of several dozens ofgiant global brands and is intensely competitive.

In the companys quest for product innovation and design to pursue its differentiation strategy, Diva Limited incurredsubstantial research and development costs in the past few years, which amount to $90 million, $105 million, $120 million,and $135 million for the years ended 2012, 2013, 2014, and 2015 respectively. The research and development costs wereexpensed off in the companys income statement in the years they were incurred.

Required

As part of the accounting analysis process, you decide that Divas accounting treatment to expense its research anddevelopment costs does not meaningfully reflect the companys underlying business economics. You estimate that 40% ofDivas research and development costs in each year should be capitalized and amortized on a straight-line basis, from thebeginning of the following year over a three-year period. Compute the effect of capitalizing the research and development costson Divas income statements and balance sheets for the financial years 2014 and 2015. Ignore any potential tax effects.Answer the following questions.

1. After the accounting adjustment, does the net income in 2014 increase or decrease? How much net income should be increased or decreased? Please show calculation.
2. After the accounting adjustment, does the net income in 2015 increase or decrease? How much net income should be increased or decreased? Please show calculation.