Mayer Biotechnical Inc. develops manufactures and sells pharmaceuticals. Significant research and development R&D expenditure are made for the development of new drugs and the improvement of existing drugs. During 2011 $220 million was spent on R&D. Of this amount $30 million was spent on the purchase of equipment to be used in a research project involving the development of a new antibiotic.

The controller Alice Copper is considering capitalizing the equipment and depreciating it over the five year useful life of the equipment at $6 million per year even though the equipment likely will be used on only one project. Ten company presidents has asked Alice to make every effort to increase 2001 earnings because in 2012 the company will be seeking significant new financing from both debt and equity sources. I guess we might use the equipment in other projects later Alice wondered to herself.

1. Assuming that the equipment was purchased at the beginning of 2011 by how much would Alice’s treatment of the equipment increase before tax earnings as opposed to expensing the equipment cost?

2. Discuss the ethical dilemma Alice faces in determining the treatment of the $30 million equipment purchase.

Answer rating: 100% (QA)

1 Alices treatment of the equipment by capitalizing would only show an expenditure of 6 million in t... View the full answer