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Chapter 11: Q11-5CA (page 597)

(Depreciation Choice鈥擡thics) Jerry Prior, Beeler Corporation鈥檚 controller, is concerned that net income may be lower this year. He is afraid upper-level management might recommend cost reductions by laying off accounting staff, including him.

Prior knows that depreciation is a major expense for Beeler. The company currently uses the double-declining-balance method for both financial reporting and tax purposes, and he鈥檚 thinking of selling equipment that, given its age, is primarily used when there are periodic spikes in demand. The equipment has a carrying value of \(2,000,000 and a fair value of \)2,180,000. The gain on the sale would be reported in the income statement. He doesn鈥檛 want to highlight this method of increasing income. He thinks, 鈥淲hy don鈥檛 I increase the estimated useful lives and the salvage values? That will decrease depreciation expense and require less extensive disclosure, since the changes are accounted for prospectively. I may be able to save my job and those of my staff.鈥�

Instructions

Answer the following questions.

  1. Who are the stakeholders in this situation?
  2. What are the ethical issues involved?
  3. What should Prior do?

Short Answer

Expert verified

Answer

  1. The taxation agency and the accounting team member are some of the stakeholders in this situation.
  2. Ethical values are being used to improve the current year's profits.
  3. Prior can predict depreciation costs and the possibility of prolonging an asset's useable life based on available data.

Step by step solution

01

Step-by-Step SolutionStep 1: Meaning of Depreciation

Depreciation is an accounting term used to indicate the expense in the books of accounts for the assets whose value declines over time. It is computed at the end of the year or whenever an asset is sold.

02

(a) Explaining the stakeholders in the given situation

The parties involved in this lawsuit are Jerry Prior, other accounting team personnel, Beeler Corporation, and the taxation agency.

Jerry Prior is responsible for reducing depreciation expenses and generating net profitability. Any changes in the two criteria mentioned above would have a big influence on him.

Beeler Corporation has a negative impact on depreciation costs and accumulated non-cash revenue.

Beeler Corporation's increased tax revenue would have an impact on the taxing agency.

03

(b) Explaining the ethical issues

In order to enhance the current year's revenues, the case incorporates ethical concerns such as enhancing the equipment's useable life and residual value. Manipulation of depreciation expenses will provide non-real income in the short term, but it will have a negative impact on the firm in the long run.

04

(c) Explaining the situation of Prior

Prior can predict depreciation costs and the possibility of prolonging an asset's useable life based on real-world data. If there is no option to extend the machinery's usable life, Prior can sell it for fair market value. Although it is not recommended, selling machinery to improve current-year profitability is still acceptable.

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Most popular questions from this chapter


(Impairment) Assume the same information as E11-16, except that Suarez intends to dispose of the equipment in the coming year. It is expected that the cost of disposal will be \(20,000.

Cost

\)9,000,000

Accumulated depreciation to date

1,000,000

Expected future net cash flows

7,000,000

Fair value

4,800,000

Instructions

  1. Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2017.
  2. Prepare the journal entry (if any) to record depreciation expense for 2018.
  3. The asset was not sold by December 31, 2018. The fair value of the equipment on that date is \(5,300,000. Prepare the journal entry (if any) necessary to record this increase in fair value. It is expected that the cost of disposal is still \)20,000.

(Depreciation Computation鈥擱eplacement, Nonmonetary Exchange) George Zidek Corporation bought a machine on June 1, 2015, for \(31,000, f.o.b. the place of manufacture. Freight to the point where it was set up was \)200, and \(500 was expended to install it. The machine鈥檚 useful life was estimated at 10 years, with a salvage value of \)2,500. On June 1, 2016, an essential part of the machine is replaced, at a cost of \(1,980, with one designed to reduce the cost of operating the machine. The cost of the old part and related depreciation cannot be determined with any accuracy.

On June 1, 2019, the company buys a new machine of greater capacity for \)35,000, delivered, trading in the old machine which has a fair value and trade-in allowance of \(20,000. To prepare the old machine for removal from the plant cost \)75, and expenditures to install the new one were \(1,500. It is estimated that the new machine has a useful life of 10 years, with a salvage value of \)4,000 at the end of that time. (The exchange has commercial substance.)

Instructions

Assuming that depreciation is to be computed on the straight-line basis, compute the annual depreciation on the new equipment that should be provided for the fiscal year beginning June 1, 2019. (Round to the nearest dollar.)

Charlie Parker, president of Spinners Company, has recently noted that depreciation increases cash provided by operations and therefore depreciation is a good source of funds. Do you agree? Discuss.

Question: Identify and explain the three types of classifications for investments in debt securities.

(Composite Depreciation) Presented below is information related to LeBron James Manufacturing Corporation.

Asset

Cost

Estimated Salvage

Estimated Life (in years)

A

\(40,500

\)5,500

10

B

33,600

4,800

9

C

36,000

3,600

9

D

19,000

1,500

7

E

23,500

2,500

6

Instructions

  1. Compute the rate of depreciation per year to be applied to the plant assets under the composite method.
  2. Prepare the adjusting entry necessary at the end of the year to record depreciation for the year.
  3. Prepare the entry to record the sale of asset D for cash of $4,800. It was used for 6 years, and depreciation was entered under the composite method.
See all solutions

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