Task 21

Task 21
Which type of asset is a patent? What is so special about this type of assets?
A patent is an intangible assets. This is an asset that can’t be touched. These assets often have a
long-term value.
Assume that Novartis has the Glivec patent on its balance sheet. In what specific section of the
balance sheet will this patent be included?
It is reported as an intangible asset on the balance sheet. This is a non-current (long term) type of
asset.
How will the events in India impact Novartis’ value of its patent on the balance sheet? How will it
impact Novartis’ income for 2013?
The value of the patent will decrease. The patent can’t really be used and other firms will also create
the drug. This will result in revenue loss.
Discuss the pros and cons of the events in India. Do you think that the use of patents should be
restricted so that cheaper generic versions of the drug can be developed sooner? Do you agree
with the statement from the PhRMA that “Protecting intellectual property is fundamental to the
discovery of new medicines?”
Pros: by not protecting patents you will increase the competition between the firms. This will result
in lower prices for consumers. This makes it possible for more people to get the treatment they
need.
Cons: if you don’t protect patents less firms will be interested in innovating a new drug, because
there profit won’t be as large. This could result in important drugs not even existing because no
company wants to be the one that invests a lot of money to innovate it.
Opinion: I think we should definitely protect patents but should also monitor the firm’s prices so that
they don’t abuse this power and start asking ridiculous prices for relatively cheap drugs to produce.
Task 22
NW: 14.5
Delta: 20
United: 27.5
Northwest Delta United

Book value Jan. 1 $75,000,00
2005 $75,000,000 0 $75,000,000
Residual $3,750,000 $3,750,000 $3,750,000
$71,250,00
Depreciable amount $71,250,000 0 $71,250,000
Useful life 14.5 20 27.5
Annual depreciation 4,913,793.103 3,562,500 2,590,909.091
Acc. Dep. Dec. 31
2008 19,655,172.41 14,250,000 10,363,636.36
Book value dec. 31
2008 55,344,827.59 60,750,000 64,636,363.64
$60,000,00
Sale price 1 $55,000,000 0 $65,000,000
750,000 363,636.4
Gain (loss) sale 1 344,827.6 (loss) (loss) (gain)
Sale price 2 60,000,000 60,000,000 60,000,000
4,655,172.4 750,000 4,636,363.4
Gain (loss) sale 2 (gain) (loss) (loss)
Why would these three companies depreciate the same equipment using different useful
lives? Describe at least two possible explanations.
1. Some airlines spent more on maintenance which increases the average life span of a plane.
2. Some airlines fly more with one plane which decreases the average life span.
Which set of sale prices (I or II) do you think is more realistic? Why?
The prices of sale 1 are more realistic because they take into account the average life and acc. Dep.
Price 2 implies that every plane has the same value but this won’t be the case. Some planes may
have flown more than the other planes and thus will be less worth.
Part 2: Garbage Trucks

Summarize the charges against Waste Management.
The management of “Waste Management” forged their books and made them look like that they
had a higher net revenue. They used several tactics which helped them to perform this fraud. One of
them was to increase the estimated lifespan of their garbage trucks and another one was to increase
the prices of their oldest trucks to make them look that they are worth more.
How did management use depreciation expense to manage earnings?

The management managed to avoid the depreciation expense by unjustifiably increasing the useful
lives of their trucks. In addition to that, they were increasing the residual values of their trucks which
had extremely low or non-existent residual value. By implementing these tactics ,they successfully
decrease their depreciation expense and increased their net income.
Why do you think the managers of Waste Management wanted to manage earnings?
To get bonuses.
What was Arthur Andersen’s role in the Waste Management case? What were the terms of its
settlement with the SEC? Did Andersen abide by the terms of the settlement?
Arthur Andersen was the auditor for Waste Management, and the firm was stimulating Waste
Management to forge their books and financial statements. Andersen was issuing materially false
and misleading audit reports. Andersen was supposed to pay 7 million dollars which was then the
largest civil penalty ever. The accounting firm was placed on permanent probation. Andersen,
however, did not abide the terms of the settlement because in 2001 the firm had its downfall and
ceased to exist after another huge scandal, known as the Enron scandal.
Suppose you were working in the accounting department at Waste Management in 1996. You
receive instructions to extend the useful lives of certain assets. What ethical dilemma would you
face? What information would you want to gather to help you evaluate the situation?
When it comes down to the ethical point of view, it is not ethical at all to commit a crime, no matter
how severe. The dilemma I could face is whether these illegal changes I were to make would harm
someone.
The required information would be what could happen if the useful lives of garbage trucks were
increased. What kind of effects could occur if the useful lives have been increased? Can these
changes cause any kind of harm to someone?
Part 3: overall analysis
Some accounting systems require all firms to use the same depreciation policies for similar assets.
For example, every firm owning a Boeing 757 would depreciate it over the same period. Do you
think GAAP should include such a requirement for financial statements? Why or why not?
Regardless of your position, your answer should include a de-scription of the advantages and
disadvantages of the proposal.
Advantages: it will be harder to hide fraud from the auditors.
Disadvantages: Not every plane has the same useful live due to factors such as usage.
Task 23
1.
20*€10=€200 already replaced.
Total: 2000*0,05*€10=€1,000
€1,000-€200=€800
2.

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Northwest Delta United

Part 2: Garbage Trucks

How did management use depreciation expense to manage earnings?

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