Depreciation expense should be considered at the time of calculating net profit so, that the company gets the correct profit and loss in the current financial year. To discuss: What types of the possible consequence of the controller’s decision on the amount of depreciation expense shown on the financial statement if this decision goes unchallenged?

Question

Mickey Gillespie is the controller of Print Technologies, a publicly owned company. The companyis experiencing financial difficulties and is aggressively looking for ways to cut costs.Suzanne Bedell, the CEO, instructs Gillespie to lengthen from 5 to 10 years the useful life usedin computing depreciation on certain special-purpose machinery. Bedell believes that this changerepresents a substantial cost savings, as it will reduce the depreciation expense on these assets bynearly one-half. Note: The proposed change affects only the depreciation expense recognized in financial state-ments. Depreciation deductions in income tax returns will not be affected. Instructionsa. Discuss the extent to which Bedell’s idea will, in fact, achieve a cost savings. Consider theeffects on both net income and cash flows.b. Who is responsible for estimating the useful lives of plant assets?c. Discuss any ethical issues that Gillespie should consider with respect to Bedell’s instructions.

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Question

Chapter 7, Problem 78.2C

To determine

Introduction:

Depreciation expense should be considered at the time of calculating net profit so, that the company gets the correct profit and loss in the current financial year.

To discuss:

What types of the possible consequence of the controller’s decision on the amount of depreciation expense shown on the financial statement if this decision goes unchallenged?

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Mickey Gillespie is the controller of Print Technologies, a publicly owned company. The companyis experiencing financial difficulties and is aggressively looking for ways to cut costs.Suzanne Bedell, the CEO, instructs Gillespie to lengthen from 5 to 10 years the useful life usedin computing depreciation on certain special-purpose machinery. Bedell believes that this changerepresents a substantial cost savings, as it will reduce the depreciation expense on these assets bynearly one-half. Note: The proposed change affects only the depreciation expense recognized in financial state-ments. Depreciation deductions in income tax returns will not be affected. Instructionsa. Discuss the extent to which Bedell’s idea will, in fact, achieve a cost savings. Consider theeffects on both net income and cash flows.b. Who is responsible for estimating the useful lives of plant assets?c. Discuss any ethical issues that Gillespie should consider with respect to Bedell’s instructions.

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