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.”
Answer the following questions.
- Who are the stakeholders in this situation?
- What are the ethical issues involved?
- What should Prior do in this situation?
Just response each posted # 1 to 3 only down below
Hello Professor and class,
The Stakeholders in this situation is Jerry Prior, and Employees from Beeler Corporation. The ethical issues will arise because Jerry wants to increase the estimated useful life and the salvage values in attempt to decrease the depreciation expense so that there is less extensive disclosure needed . Prior should estimate the depreciation expense or he can also sale the equipment at the fair market value to increase the profits for this year.
Hello Professor and Class,
As we have learned that depreciation is the allocation of tangible asset’s cost over its useful life (Kieso, Weygant, & Warfield, 2016, p. 553). The choice of depreciation method will affect the amounts that are reported on the financial statements, including the amount for reported assets and net income. Since the company uses the double-declining-balance method for both financial reporting and tax purposes, the longer useful life and higher expected residual value will decrease the number of depreciation expenses. The stakeholders who are affected by Jerry Prior’s act in this scenario are Beeler Corporation, its employees, including Prior, investors and creditors, and upper management.
The ethical issues here are honesty and integrity of an accountant as Prior in financial reporting and including the confidence of the external users as investors and creditors. If Prior sold the equipment to get a profit of $180k, this was not a good solution in the long run. $180k might be a lot for an individual but for a company that still primarily used the equipment in operation, it would be a big loss for the production line.
In my opinion, increasing the estimated useful lives and the salvage values was not a bad idea if he re-evaluated the asset. The reason was that the depreciation was just an estimated amount, it wouldn’t be wrong if he extended the useful life of it. However, one important thing was if he decided to change the equipment’s useful life, he should base on the factual information of the equipment, not because he was afraid of losing his job.
Kieso, D. E., Weygandt, J. J., & Warfield, D. T. (2016).Intermediate Accounting; 16th Edition. Various: John Wiley & Sons, Inc.
It goes without saying that Mr. Prior should continue to follow his company’s prescribed method of depreciating equipment unless otherwise directed by a superior regardless of what he thinks upper-level management may do to cut costs in the future. By purposefully tinkering with the books and not reporting it to management to save his job, he is being ethically irresponsible. It is a life lesson that eventually this will come back to haunt him, and he will probably lose his job and that of his employees who follow along with his plan. They would all be considered stakeholders in this issue as well as the entire company.
Since his company uses the double-declining balance method of depreciation they are essentially doubling up on the rate of depreciation necessary. Perhaps if he spoke to management and let them know that the equipment is reaching the end of its useful life and is getting very near to the salvage value, they would be amenable to switching to straight-line depreciation in order to lower their depreciation costs and increase their bottom line. It seems to me to be the only way to keep all stakeholders happy and the books correct while remaining ethically responsible.