Question

What is the effect of Robert Griffin's proposed change on income before taxes in the year of change? I need an explanation please

Ethics Case BYP10-7 Turner Container Company is suffering declining sales of its principal product, nonbio- degradeable 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."

Answer 1

Earlier Depreciation Expense = (Assets Value - Salvage Value )/ Useful Life of Assets =  (3,000,000 - 300,000)/8 = $337, 500

After 2 years , assets carrying value = 3,000,000 - 2* 337500 = $ 2,325,000 ( Asset will be depreciated for two years based on earlier Estimate of Depreciation Expense )

Now after increasing assets life , the number of depreciation years remaining are 12 total -2 already passed = 10 remaining
New Depreciation = (2325,000- 300,000)/10 = 202,500

The change in Income Before taxes is Difference between two depreciation Expenses , as depreciation is subtracted for the calculation of income before taxes

Difference Between Depreciation Expense = 337,500 - 202,500 = $135,000
So Income Before Taxes will increase  by $135,000

(Just my opinion - Ethically its not correct to increase assets useful life just to increase profits , but in cases where there is an actual prediction about change in estimated useful life , companies can do this to increase efficiency of their financial statements, companies can also change the method they use for accounting depreciation , in the end the amount of depreciation will remain same , but companies can extend it over longer period or shorter period it depends on type of machinery and its uses. )