Question

Yahoo! reported the following in its 2013 financial statements (in thousands):

	December 31, 2013	December 31, 2012	December 31, 2011
Revenues	$4,680,380	$4,986,566	$4,984,199
Product development expenditure	$1,008,487	$885,824	$919,368

Assume that Yahoo! expensed 90% of its product development expenditure.

Required:

1. List three types of costs that Yahoo likely includes in the product development line item on the income statement.
2. Used FSET to record the product development expenditure of 2013.
3. What type of product development expenditure might Yahoo! capitalize?

Answer 1

Answers:

a.) Types of costs included in product development could include:

• salaries and wages for R&D personnel
• computer and other types of equipment used by programmers who are performing the product development.
• costs of applying for patents and copyright protection
• legal fees for new patents
• overhead for R&D activities (heat, lighting, etc in research labs and offices)
• depreciation of capitalized R&D fixed assets
• lease payments for leased equipment or space used for development purposes

b.)

To detect a trend, we need to calculate common-sized R&D expense, which means to divide each year’s expense by that year’s revenues. Yahoo’s R&D spending decreased in 2012, but then increased in 2013. This is consistent with the changes in actual dollars of expense incurred each year.

.	December 31, 2013	December 31, 2012	December 31, 2011
Product development / Revenues	21.55%	17.76%	18.45%