Turner Container Company is suffering declining sales of its principal product,

Question

Turner Container Company is suffering declining sales of its principal product, nonbiodegradeable plastic cartons. The president, Robert Griffin, instructs his controller, Alexis Landrum, to lengthen asset lives to reduce depreciation expense. A processing line of automated plastic extruding equipment, purchased for $3.5 million in January 2019, was originally estimated to have a useful life of 8 years and a salvage value of $300,000. Depreciation has been recorded for 2 years on that basis. Robert wants the estimated life changed to 12 years total, and the straight-line method continued. Alexis is hesitant to make the change, believing it is unethical to increase net income in this manner. Robert says, “Hey, the life is only an estimate, and I've heard that our competition uses a 12-year life on their production equipment.” Instructions (a) Who are the stakeholders in this situation? (b) Is the change in asset life unethical, or is it simply a good business practice by an astute president? (c) What is the effect of Robert Griffin's proposed change on income before taxes in the year of change?

Explanation / Answer

a)

The stakeholders in this situation are mainly the owners, because by reducing depreciation the profits will be inflated. As a result of this the tax on the profit will be wrong and decisions to pay dividnds also will be wrong. Other stakeholders like creditors, debtors, the government, prospective investors etc will get the wrong idea and maybe invest in this company which is showing a wrong situation

b)

Unfortunately if he had been astute from the very beginning of the asset life it would have been different. This observation is because profits are low. Therefore here there is manipulation. He could ask the auditors to adjust it but it must be consistent and not changed again

c)

Profits will be higher

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