Discussion
Fresh Air Anti-Pollution Company is suffering declining sales of its principal product, non-biodegradable plastic cartons. The president, Tyler Weber, instructs his controller, Robin Cain, to lengthen asset lives to reduce depreciation expense. A processing line of automated plastic extruding equipment, purchased for $3.5 million in January 2014, was originally estimated to have a useful life of eight years and a salvage value of $400,000.
Depreciation has been recorded for two years on that basis. Tyler wants the estimated life changed to 12 years total and the straight-line method continued. Robin is hesitant to make the change, believing it is unethical to increase net income in this manner. Tyler says, “Hey, the life is only an estimate, and I’ve heard that our competition uses a 12-year life on their production equipment.”
Who are the stakeholders in this situation?
Is the proposed change in asset life unethical, or is it simply a good business practice by an astute president?
What is the effect of Tyler’s proposed change on income before taxes in the year of change?
