Abraham Company has a policy whereby research and development projects that are over 70 percent likely to succeed are capitalized and then depreciated over a five-year period with a full year of depreciation in the year of capitalization. In Year One, $500,000 was spent on Project One and it was 55 percent likely to be successful, $600,000 was spent on Project Two and it was 65 percent likely to be successful, and $700,000 was spent on Project Three and it was 75 percent likely to be successful. The company reported net income of $4 million for Year One. What was the appropriate net income that should have been reported?

All R&D costs should be expensed not matter what the company policy is.

Based on company's policy, we may assume that they capitalized the third project documenting $140,000 depreciation expense for a year

We should correct it as 700,000 should have been expensed instead of $140,000.

Their income 4 mln  less  $560,000 ( 140,000 out of 700,000 already expensed) = 3,440,000