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Microsoft expenses its software R&D costs, arguing that all material research and development costs are incurred before technological feasibility is reached ( US GAAP allows

Microsoft expenses its software R&D costs, arguing that all material research and
development costs are incurred before technological feasibility is reached (US GAAP allows
capitalization of development costs once technical feasibility is established until the product
is released to the market). What adjustment would be required if the analyst decided to
capitalize Microsofts software R&D and to amortize the intangible asset using the straightline method over the expected life of software ( approximately three years)?
Assume that R&D spending occurs evenly throughout the year and that only half a
years amortization is taken on the latest years spending. R&D outlays for 2007,2008,2009
and 2010 are $7.1, $8.2, $9.0 and $8.7 respectively. Given R&D outlays for the years 2007
to 2010, the R&D asset at the end of the 2009 and 2010 fiscal years (06/30/09,06/30/10) is
$12.8 and$13.2 billion, respectively. The R&D amortization expenses for 2009 and 2010 are
$7.6 billion and $8.3 billion, respectively.
Since Microsoft will continue to expense software R&D immediately for tax
purposes, the change in reporting method will give rise to a Deferred Tax Liability. Given a
marginal tax rate of 35%, following adjustment required in the financial statements.

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