Aston Corporation performs year-end planning in November of each year before its calendar year ends in December. The preliminary estimated net income is $4,800,000. 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, 2020 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   1,200,000 Net income   $  4,800,000 Aston Corporation Selected Balance Sheet Information At December 31, 2020 Estimated cash balance $  5,000,000 Available-for-sale debt investments (at cost)   10,000,000 Fair value adjustment (1/1/20) —0— Estimated fair value at December 31, 2020: 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, 2020: Equipment $3,000,000 Accumulated depreciation (5-year SL) 1,200,000 New robotic equipment (purchased 1/1/20) 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 $1,200,000 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?

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 $4,800,000. 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, 2020

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
 
1,200,000
Net income
 
$  4,800,000

Aston Corporation

Selected Balance Sheet Information

At December 31, 2020

Estimated cash balance
$  5,000,000
Available-for-sale debt investments (at cost)
  10,000,000
Fair value adjustment (1/1/20)
—0—

Estimated fair value at December 31, 2020:

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, 2020:

Equipment
$3,000,000
Accumulated depreciation (5-year SL)
1,200,000
New robotic equipment (purchased 1/1/20)
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 $1,200,000 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?

 

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