Consider the following:

1. a. Dow Chemical Company’s annual report indicated that R&D expenditures were $1,646 million during 2011. How did this amount affect income before income taxes, which was $3,601 million? Dow reports using U.S. GAAP.

b. Suppose the entire $1,646 million arose from outlays for patents acquired from various outside parties on December 30, 2011. What would be the operating income for 2011?

c. How would the Dow balance sheet, December 31, 2011, be affected by your treatment of R&D in a?

d. Suppose Dow used IFRS and identified $500 million of the $1,646 million of R&D costs as development costs for which the technical and economic feasibility has been demonstrated. How would your answer to part a change?

2. Suppose that on December 30, 2012, Verizon acquired new patents on some communications equipment for $20 million. Technology changes quickly. The equipment’s useful life is expected to be 4 years rather than the 17-year life of the patent. What will be the amortization for 2013?

3. Philip Morris purchased Kraft several years ago for approximately $13 billion. Of the $13 billion purchase price, only about $2 billion could be assigned to identifiable individual assets. What was the total amount of goodwill from the purchase recorded on the Philip Morris balance sheet? How should Philip Morris account for the goodwill in the years after the acquisition?