Question

You must label each answer with the number of question. Each question must have at least three sentence answers. There is no maximum sentence, use as many as you wish to thoroughly answer the question. All answers must be complete sentences using proper grammar and spelling

Josh, the manager of Boo, Inc bought 50 trucks for the business use.

In Year 2 , he doubled the estimated life of the trucks.

In Year 3, he increased the residual value.

Requirements

Explain an ethical reason why he doubled the estimated life .

Explain and unethical reason why he doubled the estimate life.

Explain an ethical reasons why he increased the residual value.

Explain an unethical reasons why he increased the residual value.

Discuss the GAAP issues of each of the above.

Answer 1

1. A change in a local law has allowed for the doubling of the useful life of the trucks. The new law has allowed for businesses to increase the useful life of their trucks. As a result, Josh has doubled the estimated life of the trucks.

2. The useful life was doubled with the intention of understating depreciation. Understating the depreciation will help in overstating the cost of the asset. It will also result in the overstatement of the profits in the statement of profits and losses for a given period.

3. There is an increase in demand for used trucks. The goodwill of the company that manufactures such trucks must have increased and the supply of trucks has decreased. This will result in an increase in the demand for used trucks and truck parts, and people will be willing to buy the truck, with some intending to sell the parts separately.

4. A higher residual value results in low depreciation. Consequentially, the assets will be overstated and the profits will be overstated as well. Josh has done this intentionally to inflate the assets and profits and to make the balance sheet look more attractive.

5. The accounting standard IAS 8- ‘Accounting Policies, Changes in Accounting Estimates and Errors’ says that estimates should be based on the most up to date information and should be used if it is necessary for the preparation of financial statements. Moreover, it should be based on sound judgment and should not undermine the reliability of the statements. Doubling the useful lives and increasing residual values in order to inflate the figures in the financial statements is prohibited by the GAAP standards.