Question

Ethics Case Turner Container Company is suffering declining sales of its principal product, nonbio- deable plastic cartons. The president, Robert Griffin, instructs his controller, Alexis Landrum, to Cathen asset lives to reduce depreciation expense. A processing line of automated plastic extruding quipment, 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."

Answer 1

Estimates that may need revision in given case is:Useful life of asset

Change in depreciation related estimates

As it is a change in estimate therefore, it will be accounted for in prospective manner i.e. from the date of revision until the end of useful life of asset. No adjustments are made in previous years calculations.

The process is pretty simple. Calculate the opening net book value of asset (brought forward value of asset from previous year prior to revision) and calculate the depreciation charge according to revised estimates.

Factors that may invoke revision of above estimates can be internal to entity or external.

Internal factors include:

1. Change in use and application of asset e.g. working for longer hours, used by untrained workers.
2. New information obtained that is different from previous estimates and expectations
3. Damage resulting in shorter useful life

External factors include:

1. Market value has reduced significantly that will eventually change salvage value of asset
2. Technological advancement as new equipment is available or restrictions by government may force entity to abandon the asset sooner than expected

In our case-

• Equipment Purchased in Jan,2017 for $3.5 million salvage value-$300,000,estimated useful life-8 years
• After 2Years Predident instructs his controller to estimate useful life of the equipment as 12 years, so that there is less burden of depreciation on the entity.
• Previous Depreciation per annum was- (Equipment value- salvage value)/estimated useful life=($3,500,000-$300,000)/8=$400,000 per annum
• Now from 2019 depreciation will be=$(3,200,000-800,000)/10=$240,000
• Deduction of depreciation expense=$400,000-$240,000=$160,000 per annum

Ethically-

• If there New information obtained that is different from previous estimates and expectations or any other above mentioned factors for the change of estimates,
• then, Deduction of depreciation expense=$400,000-$240,000=$160,000 per annum
• is lawful.
• But, if Deduction of depreciation expense=$400,000-$240,000=$160,000 per annum is only aimed to increase profit by $160,000 per annum then it is ethically wrong.