ACC305 Wk 5 Ethics Case 10-12 on page 553
ACC305 Wk 5 Ethics Case 10-12 on page 553 fin571
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Date Created: 11/09/15
Ethics Case 1012 on page 553 Mayer Biotechnical Inc Research and development 0 L08 Mayer Biotechnical Inc develops manufactures and sells pharmaceuticals Signi cant research and development RampD expenditures are made for the development of new drugs and the improvement of existing drugs During 2011 220 million was spent on RampD 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 Cooper is considering capitalizing the equipment and depreciating it over the veyear useful life of the equipment at 6 million per year even though the equipment likely will be used on only one project The company president has asked Alice to make every effort to increase 2011 earnings because in 2012 the company will be seeking signi cant new nancing from both debt and equity sources quotI guess we might use the equipment in other projects laterquot Alice wondered to herself Required 1 Assuming that the equipment was purchased at the beginning of 2011 by how much would Alice39s 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 Ethics Case 1012 Requirement 1 If the equipment is to be used only in the single RampD project as is likely the correct treatment is to expense the entire 30 million lf capitalized only 6 million would be expensed 30 million divided by 5 years Therefore Alice39s treatment will increase before tax earnings by 24 million 30 million 6 million Requirement 2 Ethical Dilemma Alice has a responsibility to follow GAAP by expensing the equipment purchase in its entirety However she also has a responsibility to assist her company in seeking new nancing Thus her dilemma is who does she have a greater responsibility too Ultimately If she goes with her ethics and correctly expenses the entire 30 million then she will lower 2011 before tax earnings and thus hurt her company39s chances in seeking signi cant new nancing from both debt and equity sources in 2012 Her decision will ultimate affect the following individuals Alice the president managers employees shareholders potential shareholders creditors and company auditors
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