CA software solutions PDF

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This is the suggested solution set for a Financial Accounting pset....

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The University of Chicago Booth School of Business

Financial Accounting 30000

CA, Inc. Software Development Costs

CA, Inc. (CA Technologies) is engaged in providing information technology management software and solutions. In 2016, it served more than half of the Global Fortune 500, the 20 top global banks, and the largest 25 federal agencies. The company was established in 1976 and is headquartered in New York, operating in 45 countries. When answering these questions, you can assume that impairments (if any) are already included into “Amortization of internally developed software products.” 1.

How does CA Technologies currently account for its internally developed software products to be sold, leased, or otherwise marketed? Answer: Software development costs are expensed as incurred until technological feasibility has been established. Costs incurred after technological feasibility is reached are capitalized until the product is released. After the release, the capitalized software development costs are amortized on a straight-line basis or matching the pattern of revenue for this product.

2.

During 2016, CA Technologies sold CA ERwin Data Modeling solution assets (ERwin) data protection solution assets for $50 million. The proceeds are included in “Cash provided by (used in) investing activities—discontinued operations.” a. What is the gross carrying amount of internally developed software products disposed as a part of this sale? Answer: Capitalized software development costs, Gross (A) 1,486 BB 0

1,467

Capitalized costs Disposed assets

EB

EB = BB + Capitalized costs – Disposed assets 1,467 = 1,486 + 0 – X X = 19

1

X

b. What is the accumulated amortization associated with these products? Answer:

X

Accumulated amortization (XA) BB 835 + 414 Accumulated amortization of Amortization 110 disposed assets EB 1,009 + 333

EB = BB + Amortization – Accumulated amortization of disposed assets 1,009 + 333 = 835 + 414 + 110 – X X = 17 c. What is their net book value? Answer: Net book value = Gross book value – Accumulated amortization Net book value = 19 – 17 = 2 3.

A number of competitors of CA Technologies do not capitalize internally developed software products. How would CA Technologies’ financial statements for 2016 change if software development costs were not capitalized? Ignore the effect of taxes. a. What is the effect on net income? Answer: Net Income will be higher by 110 + 2 = 112. If software development costs were not capitalized, capitalized costs will be expensed, while amortization and net book value of disposed assets will be eliminated or, alternatively, net income will be higher by the change in the net book value of capitalized software products. b. What is the effect on total assets, total liabilities, and total shareholders’ equity? Answer: Total assets will be lower by the net book value of capitalized software development costs, i.e., lower by 125. Total liabilities will not change. Total shareholders’ equity will be lower by 125, i.e., by the cumulative difference between capitalized costs and amortization. 2

c. What is the effect on total cash flow, cash flow from operations, cash flow from investing, and cash flow from financing? Answer: No change in total cash flow, cash flow from operations, investing, or financing because cash invested in capitalized software development costs is 0 in 2016.

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