Question

LO 2) Aston Corporation performs year-end planning in November of each year before its calendar year ends in December. The preliminary estimated net income is $3 million. The CFO, Rita Warren, meets with the company president, J. B. Aston, to review the projected numbers. She presents the following projected information.

ASTON CORPORATION PROJECTED INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2017
Sales		$28,995,000
Interest revenue		5,000
Cost of goods sold	$14,000,000
Depreciation	??2,600,000
Operating expenses	??6,400,000	?23,000,000
Income before income tax		6,000,000
Income tax		??3,000,000
Net income		$?3,000,000

ASTON CORPORATION SELECTED BALANCE SHEET INFORMATION AT DECEMBER 31, 2017
Estimated cash balance	$?5,000,000
Available-for-sale debt investments (at cost)	?10,000,000
Fair value adjustment (1/1/17)	—0—

Estimated fair value at December 31, 2017:

Security	Cost	Estimated Fair Value
A	$?2,000,000	$?2,200,000
B	??4,000,000	??3,900,000
C	??3,000,000	??3,100,000
D	??1,000,000	??1,800,000
Total	$10,000,000	$11,000,000

Other information at December 31, 2017:

Equipment	$3,000,000
Accumulated depreciation (5-year SL)	1,200,000
New robotic equipment (purchased 1/1/17)	5,000,000
Accumulated depreciation (5-year DDB)	2,000,000

The corporation has never used robotic equipment before, and Warren assumed an accelerated method because of the rapidly changing technology in robotic equipment. The company normally uses straight-line depreciation for production equipment.

Aston explains to Warren that it is important for the corporation to show a $7,000,000 income before taxes because Aston receives a $1,000,000 bonus if the income before taxes and bonus reaches $7,000,000. Aston also does not want the company to pay more than $3,000,000 in income taxes to the government.

Instructions

(a)  

What can Warren do within GAAP to accommodate the president's wishes to achieve $7,000,000 in income before taxes and bonus? Present the revised income statement based on your decision.

(b)  

Are the actions ethical? Who are the stakeholders in this decision, and what effect do Warren's actions have on their interests?

Answer 1

SOLUTION:

(a) :

ASTON CORPORATION

Projected Income Statement

For the year ended 31-12-2017 1. Depreciation =2600000 for the current year include 600000 old equipment & robotic equipment = 2000000, if the depreciation method on the latter is changed to straight - line, depreciation expenses is only 1000000 and total depreciation expenses for the year is 1600000$ 2. if the classification of the investment is changed from available - for -sale to trading , unrealized holding gain =1000000 can be recognized in the income statement , instead of in OCl. 3.3. Hidden holding pick up adds to an impermanent distinction between bookkeeping pay and assessable wage, as it will be burdened just in the year in which the speculations are really sold. In this way the assessment on the hidden holding increase will be dealt with as a conceded impose cost. In this way current duty obligation is just S 3,000,000, and is as per the president's arrangement. b. No, the activities are not moral, in light of the fact tha i.These activities prompt an exaggeration of pay of the present year, which will prompt exaggeration of advantages and held income in future years ii. The partners of the budgetary proclamations are denied of a genuine and reasonable perspective of the working consequences of the business and is monetary position, and iii.These activities are started just to assuage the organization president, who is just keen on how much cash he makes from the organization. He should secure the premiums of the financial specialists. Consequently there is irreconcilable situation, and rupture of trust • The current stocktholders of the organization, as they are likely going to settle on poor monetary choices based on mutilated money related data • Potential financial specialists. • The legislature, as they are getting the opportunity to gather bring down duties. • J.B. Aston, who is the initiator of the income management