Dieker Container Company is suffering declining sales of its principal product,

Question

Dieker Container Company is suffering declining sales of its principal product, nonbiode-gradeable plastic cartons. The president, Edward Mohling, instructs his controller, Betty Fetters, to lengthen asset lives to reduce depreciation expense. A processing line of automated plastic extruding equipment, purchased for $3.1 million in January 2014, 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. Edward wants the estimated life changed to 12 years total, and the straight-line method continued. Betty is hesitant to make the change, believing it is unethical to increase net income in this manner. Edward says, “Hey, the life is only an estimate, and I’ve heard that our competition uses a 12-year life on their production equipment.”

Instructions
(a) Who are the stakeholders in this situation?
(b) Is the change in asset life unethical, or is it simply a good business practice by an astute president?
(c) What is the effect of Edward Mohling’s proposed change on income before taxes in the year of change?

Explanation / Answer

a. The stakeholders in this situation are the President , The Conroller, directly and on an overall basis the investors and creditors who will use the fiancial statements of Dieker Company to make their investment and lending decisions.

b. The change in Asset life is totally unethical as it is done to inflate the profit of the period to mask the effect of declining sale. The decision has no technical logic as not necessiated by any technical study of the equipment. The manipulation of financial statement is clearly a fraud as the stakeholders and investors will be misled by the false presentation of financial statements.

c. The effect of change in depreciation policy is presented below;

Asset Cost       3,100,000 Residual value           300,000 Depreciable value       2,800,000 Useful life initial                        8 Yearly SL depreciation           350,000 Accumulated Depreciation           700,000 Remaining Depreciable value       2,100,000 Revised useful life                      12 Remaining revised life                      10 Revised SL depreciation /Year           210,000 Increase in EBIT for revised depreciation           140,000

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