Ethics Case Turner Container Company is suffering declining

Ethics Case Turner Container Company is suffering declining sales of its principal product, voobiaderadeable 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 mion in January 2017, 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, believing it is unethical 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.\" Instructions Who are the stakeholders in this situation? Is the change in asset life unethical, or is it simply a good business practice by an astute president? What is the effect of Robert Griffin\'s proposed change on income before taxes in the year of change?

Solution

a) Stakeholders are the users of the financial information of the company. In the given case, the shareholders, proposed investors, government, creditors, financial institutions are the major stakeholders. They needed the financial information for various uses of their own therefore it is very necessary for every company to depict the true and fair view of their financial information.

b) The change in the asset life is not unethical if it is with the tune of a valid reason and the company discloses such reason in its financial statements. Here, the reason is that the common practice of the similar company in the industry is to follow the life estimate of 12 years of the equipment. It is totally valid to tune the books of accounts of the company according to it if proper disclosure is given in the financial statements.

c) If the life of the asset is reinstated from 8 years to 12 years the depreciation burden on each year will reduce as the depreciation will now spread to more number of years, hence increasing the accounting profit of the company but there would be no effect on the cash profit as depreciation is a non-cash item.