Mayer Biotechnical, Inc., develops, manufactures, and sells pharmaceuticals. Significant research and development (R&D) expenditures 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 Cooper, 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. The company president has asked Alice to make every effort to increase 2011 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.
- 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?
- Discuss the ethical dilemma Alice faces in determining the treatment of the $30 million equipment purchase.