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.

1. Who are the stakeholders in this situation?
2. What are the ethical issues involved?
3. What should Prior do?

Short answer

Answer

1. The taxation agency and the accounting team member are some of the stakeholders in this situation.
2. Ethical values are being used to improve the current year's profits.
3. Prior can predict depreciation costs and the possibility of prolonging an asset's useable life based on available data.

Step-by-step solution

Step-by-Step SolutionStep 1: Meaning of Depreciation

Depreciation is an accounting term used to indicate the expense in the books of accounts for the assets whose value declines over time. It is computed at the end of the year or whenever an asset is sold.

(a) Explaining the stakeholders in the given situation

The parties involved in this lawsuit are Jerry Prior, other accounting team personnel, Beeler Corporation, and the taxation agency.

Jerry Prior is responsible for reducing depreciation expenses and generating net profitability. Any changes in the two criteria mentioned above would have a big influence on him.

Beeler Corporation has a negative impact on depreciation costs and accumulated non-cash revenue.

Beeler Corporation's increased tax revenue would have an impact on the taxing agency.

(b) Explaining the ethical issues

In order to enhance the current year's revenues, the case incorporates ethical concerns such as enhancing the equipment's useable life and residual value. Manipulation of depreciation expenses will provide non-real income in the short term, but it will have a negative impact on the firm in the long run.

(c) Explaining the situation of Prior

Prior can predict depreciation costs and the possibility of prolonging an asset's useable life based on real-world data. If there is no option to extend the machinery's usable life, Prior can sell it for fair market value. Although it is not recommended, selling machinery to improve current-year profitability is still acceptable.