Question

Aston Corporation performs year-end planning in November of each year before its calendar year ends in December. The preliminary estimated net income is \(3 million. The CFO, Rita Warren, meets with the company president, J. B. Aston, to review the projected numbers. She presents the following projected information. ASTON CORPORATION PROJECTED INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2017 Sales \)28,995,000 Interest revenue 5,000 Cost of goods sold \(14,000,000 Depreciation 2,600,000 Operating expenses 6,400,000 23,000,000 Income before income tax 6,000,000 Income tax 3,000,000 Net income \) 3,000,000 ASTON CORPORATION SELECTED BALANCE SHEET INFORMATION AT DECEMBER 31, 2017 Estimated cash balance \( 5,000,000 Available-for-sale debt investments (at cost) 10,000,000 Fair value adjustment (1/1/17) —0— Estimated fair value at December 31, 2017: Security Cost Estimated Fair Value A \) 2,000,000 \( 2,200,000 B 4,000,000 3,900,000 C 3,000,000 3,100,000 D 1,000,000 1,800,000 Total \)10,000,000 \(11,000,000 Other information at December 31, 2017: Equipment \)3,000,000 Accumulated depreciation (5-year SL) 1,200,000 New robotic equipment (purchased 1/1/17) 5,000,000 Accumulated depreciation (5-year DDB) 2,000,000 The corporation has never used robotic equipment before, and Warren assumed an accelerated method because of the rapidly changing technology in robotic equipment. The company normally uses straight-line depreciation for production equipment. Aston explains to Warren that it is important for the corporation to show a \(7,000,000 income before taxes because Aston receives a \)1,000,000 bonus if the income before taxes and bonus reaches \(7,000,000. Aston also does not want the company to pay more than \)3,000,000 in income taxes to the government.

Instructions (a) What can Warren do within GAAP to accommodate the president’s wishes to achieve $7,000,000 in income before taxes and bonus? Present the revised income statement based on your decision. (b) Are the actions ethical? Who are the stakeholders in this decision, and what effect do Warren’s actions have on their interests?

Short answer

Warran can make certain changes to the income statement. It will affect the stakeholders of the company, which are stockholders, potential investors, and the government.

Step-by-step solution

Changes brought by Warren

1. The depreciation method of robotics changed to the straight-line method.
2. Change in classification of investment to unrealized holding gain

Projected Income Statement

Aton Corporation
Projected Income Statement
For the year ended December 31, 2017
Sales		28,995,000
Interest Revenue		5,000
Cost of Goods Sold	14,000,000
Depreciation	1,600,000
Operating Expenses	6,400,000	22,000,000
Income before income taxes		7,000,000
Unrealized holding gain on trading investments		1,000,000
Income before taxes and bonus		8,000,000
Bonus		1,000,000
Taxable Income		7,000,000
Income tax Expense
Current tax expense	3,000,000
Deferred tax Expense	500,000	3,500,000
Net income		3,500,000

Part B

No, this action is not ethical.

This action will result in the overstatement of net income, which will lead to the overstatement of the asset and retained earnings of the company.

The stakeholders will not get a true and fair view of the operating results of the business.

The stakeholders are:

The stockholders of the company

Potential Investors, the government.