GROUP MEETING 3

Literature: Weygandt et al. (2019), Chapter 9 & Chapter 12

Videos: - Equity
Additional exercises: - By the end of the week, practice some more by making the additional
exercises that we created on the Wiley Plus website
- You can now also practice your accounting and business skills by
completing Level 2 of the Count FeFe game.

IMPORTANT: Your group is expected to hand in the solutions to the two tasks below. The
deadline is Monday 7 December at 2pm. You need to send the solutions by email to your tutor.

Task 22 Intangible Assets

Novartis AG is a Swiss drug-developing company. On April 1, 2013, the following article
featured on the Reuters website:

MUMBAI/NEW DELHI (Reuters) - India’s top court dismissed Swiss drugmaker Novartis
AG’s attempt to win patent protection for its cancer drug Glivec, a blow to Western
pharmaceutical firms targeting India to drive sales and a victory for local makers of cheap
generics.
The decision sets a benchmark for intellectual property cases in India, where many
patented drugs are unaffordable for most of its 1.2 billion people, and does not bode well for
foreign firms engaged in ongoing disputes in India, including Pfizer Inc and Roche Holding
AG, analysts said.
It cements the role of local companies as big suppliers of inexpensive generics to India’s
rapidly growing $13 billion-a-year drugs market and also across the developing world. Among
the chief beneficiaries of Monday’s Supreme Court ruling will be India’s Cipla Ltd and Natco
Pharma Ltd, which already sell generic Glivec in India at around one-tenth of the price of the
branded drug.
“The multinational companies will have to find new ways of doing business in India,”
said Deepak Malik, healthcare analyst at brokerage Emkay Global, suggesting they may
consider licensing agreements with local firms to offer cheap versions of branded drugs like
Glivec.
Ranjit Shahani, managing director of Novartis India Ltd, the firm’s locally listed unit,
said it would be cautious about investing in India, especially over introducing new drugs, and
seek patent protection before launching any new products. It will continue to refrain from
research and development activities there. “The intellectual property ecosystem in India is not
very encouraging,” Shahani told reporters in Mumbai after the ruling.
Healthcare activists have asked the government to make medicines cheaper in a country
where many patented drugs are too costly for most people, 40 percent of whom earn less than
$1.25 a day, and where patented drugs account for under 10 percent of total drug sales. “This
appears to be the best outcome for patients in developing countries as fewer patents will be
granted on existing medicines,” said Leena Menghaney, Medecins Sans Frontieres’ Access
Campaign manager for India.
Over 16,000 patients in India use Glivec and the vast majority of those get it free of
charge, Novartis says. By contrast, generic Glivec is used by more than 300,000 patients,
according to industry reports.
The U.S. industry trade group Pharmaceutical Research and Manufacturers of America,
or PhRMA, said the decision reflected a deteriorating environment for innovation in India.
“Protecting intellectual property is fundamental to the discovery of new medicines,” the group
said in a statement. “To solve the real health challenges of India’s patients, it is critically
important that India promote a policy environment that supports continued research and
development of new medicines.”
Questions
1. Which type of asset is a patent? What is so special about this type of assets?
2. Assume that Novartis has the Glivec patent on its balance sheet. In what specific
section of the balance sheet will this patent be included?
3. How will the events in India impact Novartis’ value of its patent on the balance sheet?
How will it impact Novartis’ income for 2013?
4. 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.”

Task 23 Equity

Case 1
Kohl’s Corporation operates department stores in 49 states in the U.S. and has annual sales in
excess of $18 billion. Kohl has several line items comprising its stockholders’ equity. See the
excerpts below from Kohl’s 2015 annual report: a partial Consolidated Balance Sheet, its
Consolidated Statement of Changes in Shareholders’ Equity, and a section from its Notes to
Financial Statements.

Kohl’s Consolidated Balance Sheets of January 31, 2015 (enlarged Shareholders’ Equity
section):
Kohl’s Consolidated Statements of Changes in Shareholders’ Equity of January 31, 2015:

Excerpt from Notes to Financial Statements:

Questions
1. What types of stock is Kohl’s authorized to issue? How many shares of each type are
authorized to be issued?
2. Approximately how many shares of common stock have been issued as of January 31, 2015?
3. Approximately how many shares of common stock were outstanding as of January 31, 2015?
4. Why is treasury stock shown as a negative on the balance sheet?
5. Do Kohl’s accumulated earnings to date exceed its accumulated losses and dividends
declared to date? How do you know?
6. Assume that in 2015, Kohl declared to pay $321 million in cash dividends on 21 July 2015
and paid it on 5 September 2015. On what date would the dividend become a liability for Kohl?
Make the journal entries for the declaration and the payment day.
Case 2
In its annual report for the year ended December 31, 2014, Caterpillar Inc. reported earnings
per share (EPS) of $5.88, an increase of $0.13 from the prior year’s reported EPS of $5.75.
The company attributed the increased EPS to better performance in several areas of its business.
Overall, however, Caterpillar’s revenues, operating profit, and net income all declined in 2014.

Caterpillar’s CEO’s year-end bonus is based on overall company performance and changes in
EPS. The Board of Directors approves the CEO’s compensation package, and the CEO is the
Chairman of the Board. For the year of 2014, the CEO received a $2 million performance
bonus.
An analysis of Caterpillar’s 2014 annual report reveals that the company increased the number
of treasury stock (common) shares held in the treasury by over 31.6 million shares during 2014.
Questions
1. What effect did the increase in treasury stock shares have on Caterpillar’s EPS change in
2014? Explain.
2. What does the journal entry for the purchase of these treasury shares during 2014 look like,
assuming that each share was purchased for $10?
3. Assume that Caterpillar sells 10 million of treasury shares in 2015 for a price of $12 per
share. What is the journal entry for this transaction?
4. Based on the information above, what effect do you think the company’s performance had
on the CEO’s year-end bonus for 2014? Explain your answer.
5. What potential conflicts of interest can you identify in the determination of the CEO’s
compensation package? How might these conflicts be managed or eliminated?

Case 3
In February 2017, Snap Inc., the parent company of Snapchat, decided to launch its initial
public offering (IPO). Snap planned to issue common stock class A shares in this IPO and these
common stock class A shares would have no voting rights. Private investors would still own
Snap’s common stock class B shares, which provide one vote per share of class B stock owned.
Snap’s founders would own its common stock class C shares, which give the two founders ten
votes per share of class C stock owned. The two founders have total control of Snap through
their voting rights.
Questions
1. When Snap issues these common stock class A shares, what impact will this stock issuance
have on Snap’s assets, liabilities, and equity?
2. What is the risk to common shareholders from having no voting rights?
3. What impact do you think the lack of voting rights will have on the initial offering price
(i.e., the price of the shares when they are available on the stock market for the first time)?