Turner Container Company is suffering declining sales of its principal product, non-biodegradable 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 2020, 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, 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.” a. Why would Alexis be hesitant to make such a change?b. Is it simply a good business practice by an astute president or is there something more?c. What role does estimates play in accounting and in PP&E in particular?d. What are your thoughts on the situation and the potential impact on the changes?
Turner Container Company is suffering declining sales of its principal product, non-biodegradable 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 2020, 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, 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.” a. Why would Alexis be hesitant to make such a change?b. Is it simply a good business practice by an astute president or is there something more?c. What role does estimates play in accounting and in PP&E in particular?d. What are your thoughts on the situation and the potential impact on the changes?
Chapter11: Cash Flow Estimation And Risk Analysis
Section: Chapter Questions
Problem 10P
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Turner Container Company is suffering declining sales of its principal product, non-biodegradable 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 2020, 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, 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.”
a. Why would Alexis be hesitant to make such a change?b. Is it simply a good business practice by an astute president or is there something more?c. What role does estimates play in accounting and in PP&E in particular?d. What are your thoughts on the situation and the potential impact on the changes?
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