Question

In: Accounting

Turner Container Company is suffering declining sales of its principal product, nonbiodegradeable

Turner Container Company is suffering declining sales of its principal product, nonbiodegradeable plastic cartons. The president, Robert Griffin, instructs his controller, Alexis Landrum, to lengthen asset lives to reduce depreciation expense. A processing line of automated plastic extruding equipment, purchased for $3.5 million in January 2017, was originally estimated to have a useful life of 8 years and a salvage value of $300,000. Depreciation has been recorded for 2 years on that basis. Robert wants the estimated life changed to 12 years total, and the straight-line method continued. Alexis is hesitant to make the change, believing it is unethical to increase net income in this manner. Robert says, “Hey, the life is only an estimate, and I’ve heard that our competition uses a 12-year life on their production equipment.”

 

Instructions

(a) Who are the stakeholders in this situation?

(b) Is the change in asset life unethical, or is it simply a good business practice by an astute president?

(c) What is the effect of Robert Griffin’s proposed change on income before taxes in the year of change?

 

 

Solutions

Expert Solution

a)

Stakeholders are the users of the financial information of the company. In the given case, the shareholders, proposed investors, government, creditors, financial institutions are the major stakeholders. They needed the financial information for various uses of their own therefore it is very necessary for every company to depict the true and fair view of their financial information.

 

b)

The change in the asset life is not unethical if it is with the tune of a valid reason and the company discloses such reason in its financial statements. Here, the reason is that the common practice of the similar company in the industry is to follow the life estimate of 12 years of the equipment. It is totally valid to tune the books of accounts of the company according to it if proper disclosure is given in the financial statements.

 

c)

If the life of the asset is reinstated from 8 years to 12 years the depreciation burden on each year will reduce as the depreciation will now spread to more number of years, hence increasing the accounting profit of the company but there would be no effect on the cash profit as depreciation is a non-cash item.


 

 

Related Solutions

Clean Aire Anti-Pollution Company is suffering declining sales of its principal product, non-biodegradable plastic cartons. The...
Clean Aire Anti-Pollution Company is suffering declining sales of its principal product, non-biodegradable plastic cartons. The president, Wade Truman, instructs his controller, Kate Rollins, to lengthen asset lives to reduce depreciation expense. A processing line of automated plastic extruding equipment, purchased for $3.5 million in January 2022, was originally estimated to have a useful life of 8 years and a salvage value of $400,000. Depreciation has been recorded for 2 years on that basis. Wade wants the estimated life changed...
Expand Your Critical Thinking 9-7 Monty Corporation is suffering declining sales of its principal product, nonbiodegradeable...
Expand Your Critical Thinking 9-7 Monty Corporation is suffering declining sales of its principal product, nonbiodegradeable plastic cartons. The president, Robert Griffin, instructs his controller, Alexis Landrum, to lengthen asset lives to reduce depreciation expense. A processing line of automated plastic extruding equipment, purchased for $2.20 million in January 2019, was originally estimated to have a useful life of 8 years and a salvage value of $280,000. Depreciation has been recorded for 2 years on that basis. Robert wants the...
Ferris Company began January with 7,000 units of its principal product. The cost of each unit...
Ferris Company began January with 7,000 units of its principal product. The cost of each unit is $6. Merchandise transactions for the month of January are as follows: Purchases Date of Purchase Units Unit Cost* Total Cost Jan. 10 6,000 $ 7 $ 42,000 Jan. 18 7,000 8 56,000 Totals 13,000 98,000 * Includes purchase price and cost of freight. Sales Date of Sale Units Jan. 5 3,000 Jan. 12 3,000 Jan. 20 4,000 Total 10,000 10,000 units were on...
Ferris Company began January with 6,000 units of its principal product. The cost of each unit...
Ferris Company began January with 6,000 units of its principal product. The cost of each unit is $9. Merchandise transactions for the month of January are as follows: Purchases Date of Purchase Units Unit Cost* Total Cost Jan. 10 5,000 $ 10 $ 50,000 Jan. 18 6,000 11 66,000 Totals 11,000 116,000 * Includes purchase price and cost of freight. Sales Date of Sale Units Jan. 5 3,000 Jan. 12 2,000 Jan. 20 4,000 Total 9,000 8,000 units were on...
Ferris Company began January with 4,000 units of its principal product. The cost of each unit...
Ferris Company began January with 4,000 units of its principal product. The cost of each unit is $6. Merchandise transactions for the month of January are as follows: Purchases Date of Purchase Units Unit Cost* Total Cost Jan. 10 3,000 $ 7 $ 21,000 Jan. 18 4,000 8 32,000 Totals 7,000 53,000 * Includes purchase price and cost of freight. Sales Date of Sale Units Jan. 5 2,000 Jan. 12 1,000 Jan. 20 3,000 Total 6,000 5,000 units were on...
Ferris Company began 2018 with 6,000 units of its principal product. The cost of each unit...
Ferris Company began 2018 with 6,000 units of its principal product. The cost of each unit is $6. Merchandise transactions for the month of January 2018 are as follows: Purchases Date of Purchase Units Unit Cost* Total Cost Jan. 10 5,000 $ 7 $ 35,000 Jan. 18 6,000 8 48,000 Totals 11,000 83,000 *Includes purchase price and cost of freight. Sales Date of Sale Units Jan. 5 3,000 Jan. 12 2,000 Jan. 20 4,000 Total 9,000 8,000 units were on...
Ferris Company began 2018 with 4,000 units of its principal product. The cost of each unit...
Ferris Company began 2018 with 4,000 units of its principal product. The cost of each unit is $7. Merchandise transactions for the month of January 2018 are as follows: Purchases Date of Purchase Units Unit Cost* Total Cost Jan. 10 3,000 $ 8 $ 24,000 Jan. 18 4,000 9 36,000 Totals 7,000 60,000 *Includes purchase price and cost of freight. Sales Date of Sale Units Jan. 5 2,000 Jan. 12 1,000 Jan. 20 3,000 Total 6,000 5,000 units were on...
Ferris Company began 2018 with 6,000 units of its principal product. The cost of each unit...
Ferris Company began 2018 with 6,000 units of its principal product. The cost of each unit is $8. Merchandise transactions for the month of January 2018 are as follows: Purchases Date of Purchase Units Unit Cost* Total Cost Jan. 10 5,000 $ 9 $ 45,000 Jan. 18 6,000 10 60,000 Totals 11,000 105,000 * Includes purchase price and cost of freight. Sales Date of Sale Units Jan. 5 3,000 Jan. 12 2,000 Jan. 20 4,000 Total 9,000 8,000 units were...
Ferris Company began January with 7,000 units of its principal product. The cost of each unit...
Ferris Company began January with 7,000 units of its principal product. The cost of each unit is $6. Merchandise transactions for the month of January are as follows: Purchases Date of Purchase Units Unit Cost* Total Cost Jan. 10 6,000 $ 7 $ 42,000 Jan. 18 7,000 8 56,000 Totals 13,000 98,000 * Includes purchase price and cost of freight. Sales Date of Sale Units Jan. 5 3,000 Jan. 12 3,000 Jan. 20 4,000 Total 10,000 10,000 units were on...
Ferris Company began January with 7,000 units of its principal product. The cost of each unit...
Ferris Company began January with 7,000 units of its principal product. The cost of each unit is $6. Merchandise transactions for the month of January are as follows: Purchases Date of Purchase Units Unit Cost* Total Cost Jan. 10 6,000 $ 7 $ 42,000 Jan. 18 7,000 8 56,000 Totals 13,000 98,000 * Includes purchase price and cost of freight. Sales Date of Sale Units Jan. 5 3,000 Jan. 12 3,000 Jan. 20 4,000 Total 10,000 10,000 units were on...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT