Basket purchases and R&D In Process. When Intellicorp Inc., a business software firm, purchased ICS Deloitte Management's interface technology for $6.6 million, it allocated $4.8 million to R&D In Process. Assume it allocated the rest of the purcha.

se price to land.

In the year of the purchase, Intellicorp's net income before accounting for the costs of this purchase was $1.7 million.

The SEC challenged the allocation of $4.8 million to R&D In Process, and Intellicorp decreased the charge for the quarter of purchase for R&D In Process to $2.7 million. Intellicorp then allocated the $2.1 (= $4.8 - $2.7) million to goodwill.

Intellicorp will amortize goodwill arising as a result of the SEC's challenge over 10 years and will charge a full year of amortization against earnings for the year of acquisition.

Assume Intellicorp's earnings before costs relating to this purchase increase to

$2.6 million per year as a result of the purchase. The increased income begins on the first day of the year following the acquisition.

Ignore income tax effects of this purchase in analyzing the following questions.

a. What was Intellicorp's net earnings for the year of the purchase when it allocated

$4.8 million to R&D In Process? What will be the earnings in subsequent years?

b. What was Intellicorp's net earnings for the year of the purcha.se when it allocated

$2.7 million to R&D In Process? What will be the earnings in subsequent years?

c. If an analyst projects Intellicorp's value at 15 times annual earnings, how does the SEC's ruling that Intellicorp must change its accounting for R&D In Process affect the analyst's valuation of the company'.'

ii. Depreciation calculations affect net income; working backward to derive depreciable a.ssets' cost. The third-quarter report of Deutsche Lufthansa AG for a recent year reported a change in the airline's depreciation policies. The following was reported in the Wall Street Journal:

BONN—Using new accounting methods for depreciation |Luflh;ins;il was able lo limit lis pretax losses in the tirst nine iiionlhs . . . lo 262 million marks. The pretax loss of 262 million iiuirks in the lirsl nine months represented an accomplishmcnl for the company, which announced first-half pretax losses (for this year) of 542 million marks. . . . The reason the pretax loss for the first nine months narrowed from the level of the first half is because of [sic] accounting practices. The German state-owned air carrier said in September that it would change the way it does its accounts with a new policy of writing off its fleet of aircraft over a 12-year period to 15 percent of their (cost). The previous policy had called for planes to be written off over 10 years to 5 percent of their co.st. . . . One analyst said that the entire improvement in Lufthansa's third quarter results was attributable to (restating depreciation for the first nine months of the year for the) new accounting principles, rather than fundamentals.

Use these details to deduce the cost in marks of Lufthansa's fleet of aircraft.

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