LO 2) Aston Corporation performs year-end planning in Novemberof each year before its calendar year ends in December. Thepreliminary estimated net income is $3 million. The CFO, RitaWarren, meets with the company president, J. B. Aston, to reviewthe projected numbers. She presents the following projectedinformation.
ASTON CORPORATION PROJECTED INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2017 |
|---|
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 | | ??3,000,000 |
Net income | | $?3,000,000 |
ASTON CORPORATION SELECTED BALANCE SHEET INFORMATION AT DECEMBER 31, 2017 |
|---|
Estimated cash balance | $?5,000,000 |
Available-for-sale debt investments (at cost) | ?10,000,000 |
Fair value adjustment (1/1/17) | —0— |
Estimated fair value at December 31, 2017:
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, 2017:
Equipment | $3,000,000 |
Accumulated depreciation (5-year SL) | 1,200,000 |
New robotic equipment (purchased 1/1/17) | 5,000,000 |
Accumulated depreciation (5-year DDB) | 2,000,000 |
The corporation has never used robotic equipment before, andWarren assumed an accelerated method because of the rapidlychanging technology in robotic equipment. The company normally usesstraight-line depreciation for production equipment.
Aston explains to Warren that it is important for thecorporation to show a $7,000,000 income before taxes because Astonreceives a $1,000,000 bonus if the income before taxes and bonusreaches $7,000,000. Aston also does not want the company to paymore than $3,000,000 in income taxes to the government.
Instructions
(a)
What can Warren do within GAAP to accommodate the president'swishes 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 thisdecision, and what effect do Warren's actions have on theirinterests?
