American Movieplex, a large movie theater chain, leases most of its theater faci

Question

American Movieplex, a large movie theater chain, leases most of its theater facilities. In conjunction with recent operating leases, the company spent $28 million for seats and carpeting. The question being discussed over breakfast on Wednesday morning was the length of the depreciation period for these leasehold improvements. The company controller, Sarah Keene, was surprised by the suggestion of Larry Person, her new assistant. Keene: Why 25 years? We've never depreciated leasehold improvements for such a long period. Person: I noticed that in my review of back records. But during our expansion to the Midwest, we don't need expenses to be any higher than necessary. Keene: But isn't that a pretty rosy estimate of these assets' actual life? Trade publications show an average depreciation period of 12 years. Reflect on the following: How would increasing the depreciation period affect American Movieplex's income? Who would be affected if Person's suggestion is followed? Does revising the estimate pose an ethical dilemma?

Explanation / Answer

How would increasing the depreciation period affect American Movieplex's income?

Increasing the depreciation period will stretch the expense over 25 years instead of 12, this will increase American Movieplex’s net income for an additional 13 years.

Who would be affected if Person's suggestion is followed?

By following Person's suggestion this could have effects on American Movieplex administrators, investors, lenders, and employees as well as auditors.

Does revising the estimate pose an ethical dilemma?

Increasing the depreciation time period is to lower expenses and ultimately increase their net revenue for their new expansion in the Midwest. If American Movieplex standard practice is to follow trade publications of 12 years for lease hold improvements and they chose to elect to depreciate for 25 years, they are doing so to inflate their profits, and this is an unethical practice

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