Mickey Gillespie is the controller of Print Technologies, a publicly owned company. The company is experiencing financial difficulties and is aggressively looking for ways to cut.costs.
Suzanne Bedell, the CEO, instructs Gillespie to lengthen from 5 to 10 years the useful life used in computing depreciation on certain special-purpose machinery. Bedell believes that this change represents a substantial cost savings, as it will reduce the depreciation expense on these assets by nearly one-half.
Note: The proposed change affects only the depreciation expense recognized in financial statements. Depreciation deductions in income tax returns will not be affected.
Instructions
a. Discuss the extent to which Bedell’s idea will, in fact, achieve a cost savings. Consider the effects on both net income and cash flows.
b. Who is responsible for estimating the useful lives of plant assets?
c. Discuss any ethical issues that Gillespie should consider with respect to Bedell’s instructions.
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