(Depreciation Choice—Ethics) Jerry Prior, Beeler Corporation\'s controller, is c
ID: 2586870 • Letter: #
Question
(Depreciation Choice—Ethics)
Jerry Prior, Beeler Corporation's 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's 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't want to highlight this method of increasing income. He thinks, “Why don't 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.”
Instructions
Answer the following questions.
(a)
Who are the stakeholders in this situation?
(b)
What are the ethical issues involved?
(c)
What should Prior do?
Explanation / Answer
a. Stakeholders: Investor, Board Members and Employees having stock options.
b. Ethical Issues:
1. Playing with books and numbers just to meet earning target is not good practice.
2. Incorrect reporting is never assumed to be ethical even if to save jobs of employees.
3. Changing Value and salvage value of assets without any solid support is not correct because its being done just to meet target earning.
c. What should Prior do?
He should report income while calculating depreciation using current method of depreciation.
If want to report higher income, they must sell the equipment.
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