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CFA Level 1 Exam

3959 Questions

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Question No. 1

After the initial feasibility studies, all software development costs can be capitalized under US GAAP. Ultrasoft

and Littlesoft are rival firms which are similar in size and scope of operations. Ultrasoft has decided not to
capitalize but expense software development costs in Year
1. Littlesoft, on the other hand, has decided to capitalize a similar amount of development costs, to be
amortized over 5 years. Which of the following is/are true over the next 5 years?
I. Littlesoft will show higher equity than Ultrasoft
II. The difference in Littlesoft's assets and Ultrasoft's assets will be lower in Year 3 than in Year 2.
III. The total tax deductions due to the development costs are equal for the two firms.
Choose the correct option from the given list.
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