Ethics Case 15–3 Leasehold improvements LO15-3 American Movieplex, a large movie
ID: 2570032 • Letter: E
Question
Ethics Case 15–3 Leasehold improvements
LO15-3
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.
Required:
How would increasing the depreciation period affect American Movieplex’s earnings?
Does revising the estimate pose an ethical dilemma?
Who would be affected if Person’s suggestion is followed?
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.
Explanation / Answer
How would increasing the depreciation period affect American movieplex’s earnings?
If the depreciation period is increased, then the net income will be increased because depreciation period would extend over a period of next 25 years. Increase in depreciation period will also lead to reduce in payment of lease rental every year so that net income will increase over the period of 13 years ( present 12 years, extended for 25 years.difference 13 years) to American movieplex.
Does revising the estimate pose ethical dilemma?
The reason for revising estimate and to change lease agreement is to increase the net income for American movieplex and also reduces expenses which would lead it ethical dilemma.
Who would be affected if person’s suggestion is followed?
Stakeholders, administrators, employees, lenders, investors and auditors would be affected if the person’s suggestion is followed.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.