interest capitalization

CFA Level I
#1

Geanne Manufacturing capitalizes its software development costs. For the most recent year, the following was recorded: New investment in software $200 Software (gross) $1000 Accumulated software amortization $700 Software amortization expense $300 If Geanne had always expensed its development costs, this year’s pre-tax operating income would have been: A. $100 higher than reported. B. $100 lower than reported C. $300 lower than reported D. $400 lower than reported Addition question resulted from the above. Pre-tax operating income is EBT, right? For a manafacturing firm, are investments in intangible assets (e.g. software) and tangible asset (e.g. equipment) operating activitities, repectively?

#2

C

#3

Not C

#4

hmm sorry. Was B.

#5

I am getting A. For this year under capitalization total expenses are 300K (amortization) Software development cost this year =200K—> so if expensed this is the cost Therefore, expensing will results in higher income for this year (higher by 300-200)

#6

Answer is A. Thunderanalyst, please confirm if my understanding is correct. If expensing in this year, $300 armortization expense would not exist, but $200 new investment would be expense. So net is expense decrease by 100, pre-tax operating income increase by $100. Plus, in expensing accounting, how to record the $200 software investment in income statement. Is is operating activity or investing activity?

#7

Can someone explain the movements of the balance sheet and income staments? I am getting confused now

#8

hopetobeat Wrote: ------------------------------------------------------- > Answer is A. > > Thunderanalyst, please confirm if my understanding > is correct. > > If expensing in this year, $300 armortization > expense would not exist, but $200 new investment > would be expense. So net is expense decrease by > 100, pre-tax operating income increase by $100. I think A is also the right answer by this reasoning. > Plus, in expensing accounting, how to record the > $200 software investment in income statement. Is > is operating activity or investing activity? I don’t believe the I/S is broken out between operating and investing as the cash flow statement is.