Question

Computer Gaming Industries has just started business as a computer-based gaming company. Knowing that small computer businesses rarely remain in business longer than five years, Computer Gaming depreciates all its assets for five years. The assets include a building, integrated circuit shaper, and vehicles. Is this ethical? What impact will its action have on the net income? What, if any, is the correct action?

Answer 1

There are three questions:

Q1)

Answer: no; this is not ethical.

Assets should not be depreciated based on the life of the company. If it is done all assets would be depreciated for one specific period (which is 5 years her), although life of those assets may be different from the projected life of the company.

Q2)

Answer: net income gets reduced by this action.

Net income is the difference of total revenues and total expenses. Suppose a building has actually 50 years of life but if its value is absorbed in 5 years, its depreciation would be high; such thing increases expenses and reduces net income in each year during that 5-year time.

Q3)

Answer: assets should be depreciated based on their merits.

Suppose a building has 50 years of life, so there should be 50 years of depreciation schedule; a vehicle has 10 years of life and its depreciation schedule should be for 10 years. Once this is done, amount of depreciation would be low and net income would be authentic.