Question

American Movieplex, a large movie theater chain, leases most of its theater facilities. In conjunction with recent operating leases, the company spent $28 million for seats and carpeting. The question being discussed over breakfast on Wednesday morning was the length of the depreciation period for these leasehold improvements. The company controller, Sarah Keene, was surprised by the suggestion of Larry Person, her new assistant.

Keene:	Why 25 years? We’ve never depreciated leasehold improvements for such a long period.
Person:	I noticed that in my review of back records. But during our expansion to the Midwest, we don’t need expenses to be any higher than necessary.
Keene:	But isn’t that a pretty rosy estimate of these assets’ actual life? Trade publications show an average depreciation period of 12 years.

Required:

1. How would increasing the depreciation period affect American Movieplex’s earnings?
2. Does revising the estimate pose an ethical dilemma?
3. Who would be affected if Person’s suggestion is followed?

Answer 1

After depreciating leasehold improvements the exercise is “its cost is apportioned as depreciation expense over its beneficial life to the lease, which will be the smaller of the life of the asset or the term”. When trade publications indicate an average depreciation period of 12 years this is for the reason that that is the projected useful life of those kinds of developments.

Requirement 1

Increasing the depreciation period will expanse the expense over 25 years in its place of 12 will escalate American Movieplex’s net income for an additional 13 years.

Requirement 2

This does pose an moral predicament. As the perception behind increasing the depreciation time period is to lessenr expenses and eventually upsurge net income in their development to the Midwest. If American Movieplex standard practice is to trail trade publication average depreciation of 12 years then it is a pure determination to expand profits, and in turn is unprincipled conduct.

Requirement 3

By accepting Person’s proposal this could have effects on American Movieplex administrators, investors, present and future stakeholders, lenders employees and auditors.