Case #2At the beginning of 2014, the Fancy Food Company purchasedequipment for $42 million...Case...

80.2K

Verified Solution

Question

Accounting

Case #2
At the beginning of 2014, the Fancy Food Company purchasedequipment for $42 million to be used in the manufacture of a newline of gourmet frozen foods. The equipment was estimated to have a10-year service life and no residual value. The straight-linedepreciation method was used to measure depreciation for 2014 and2015.
Late in 2016, it became apparent that sales of the new frozenfood line were significantly below expectations. The companydecided to continue production for two more years (2017 and 2018)and then discontinue the line. At that time, the equipment will besold for minimal scrap values.
The controller, Shannon Jones, was asked by Jerry Dent, thecompany's chief executive officer (CEO), to determine theappropriate treatment of the change in service life of theequipment. Shannon determined that there has been an impairment ofvalue requiring an immediate write-down of the equipment of$12,900,000. The remaining book value would then be depreciatedover the equipment's revised service life (3 years).
The CEO does not like Shannon’s conclusion because of the effectit would have on 2016 income. “Looks like a simple revision inservice life from 10 years to 5 years to me,” Dent concluded.“Let's go with it that way, Shannon.”
Required:
1. What is the difference in before-tax income between the CEO'sand Shannon’s treatment of the situation? (Hint: calculatebefore-tax income the way the CEO would like and compare toShannon’s method).
2. Why would the CEO have an incentive to not record theimpairment?
3. Discuss Shannon’s ethical dilemma and give her advice on howto handle this situation.

Answer & Explanation Solved by verified expert

4.5 Ratings (759 Votes)

1 Before tax income using the CEOs treatment of the situation Original cost 42 million or 42000000 Thus annual depreciation amount as per the straight line method 4200000010 years 4200000 per year or 42 million per year Depreciation till date for 2014 and 2015 4200000 per year2 years 8400000 or 84 million per year Thus book value 42000000 8400000 33600000 Thus new amount of depreciation 336000003 years remaining 11200000 per year for 2016 2017 and See Answer

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

In: AccountingCase #2At the beginning of 2014, the Fancy Food Company purchasedequipment for $42 million...Case #2At the beginning of 2014, the Fancy Food Company purchasedequipment for $42 million to be used in the manufacture of a newline of gourmet frozen foods. The equipment was estimated to have a10-year service life and no residual value. The straight-linedepreciation method was used to measure depreciation for 2014 and2015.Late in 2016, it became apparent that sales of the new frozenfood line were significantly below expectations. The companydecided to continue production for two more years (2017 and 2018)and then discontinue the line. At that time, the equipment will besold for minimal scrap values.The controller, Shannon Jones, was asked by Jerry Dent, thecompany's chief executive officer (CEO), to determine theappropriate treatment of the change in service life of theequipment. Shannon determined that there has been an impairment ofvalue requiring an immediate write-down of the equipment of$12,900,000. The remaining book value would then be depreciatedover the equipment's revised service life (3 years).The CEO does not like Shannon’s conclusion because of the effectit would have on 2016 income. “Looks like a simple revision inservice life from 10 years to 5 years to me,” Dent concluded.“Let's go with it that way, Shannon.”Required:1. What is the difference in before-tax income between the CEO'sand Shannon’s treatment of the situation? (Hint: calculatebefore-tax income the way the CEO would like and compare toShannon’s method).2. Why would the CEO have an incentive to not record theimpairment?3. Discuss Shannon’s ethical dilemma and give her advice on howto handle this situation.