Zynga

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ZYNGA
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

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