Q1.
Since game development involves several phases, including pre-production, pitches, prototypes, and game design documents. Given that it usually involves 100-person team to take different responsibility for development, R&D is a long-term process and should be capitalized.
Meanwhile, Zynga’s R&D costs are directly related to the production of the games hence generating profits. It is a resource of future economic benefit that owned and under control of the company, therefore economically could be treated as assets.
Q2.
By a 3-year straight-line depreciation method, the revised R&D cost is calculated by 1/3*Rt+1/3*Rt-1 + 1/3*Rt-2
Rev | $ 19.41 | $ 121.47 | $ 597.46 | $ 1,140.10 | Cost of Rev | $ (10.02) | $ (56.71) | $ (176.05) | $ (330.04) | SG&A | $ (19.82) | $ (66.51) | $ (146.42) | $ (488.65) | Revised R&D | $ (4.05) | $ (21.06) | $ (70.90) | $ (309.19) | Operating Income | $ (14.48) | $ (22.81) | $ 204.09 | $ 12.22 | Other income | $ 0.19 | $ (0.21) | $ 0.36 | $ (2.21) | Income Tax | $ - | $ - | $ 58.68 | $ 2.87 | Net Income | $ (14.29) | $ (23.02) | $ 145.76 | $ 7.14 | | | | | | Note: original R&D cost | $ (12.16) | $ (51.03) | $ (149.52) | $ (727.02) |
The adjusted assets from R&D is (2/3)*Rt + (1/3)*Rt-1
| 2009 | 2010 | 2011 | Original Assets | 258.85 | 1112.57 | 2516.65 | Adjusted Assets from R&D | $38.07 | $116.69 | $534.52 | Total asset | $296.92 | $1,229.26 | $3,051.17 | Liabilities | 280.33 | 630.36 | 767.11 | Equity | $16.59 | $598.90 | $2,284.06 |
We observe that the amortization of capitalized R&D asset increase Net Income in Income Statement (tax impact included) and increase Assets and Equity by the same amount in the Balance Sheet (assuming no change in liabilities).
Q. 3
Steps