Question

At the beginning of 2019, the Healthy Life Food Company purchased equipment for $42 million to be used in the manufacture of a new line of gourmet frozen foods. The equipment was estimated to have a 10-year service life and no residual value. The straight-line depreciation method was used to measure depreciation for 2019 and 2020. Late in 2021, it became apparent that sales of the new frozen food line were significantly below expectations. The company decided to continue production for two more years (2022 and 2023) and then discontinue the line. At that time, the equipment will be sold for minimal scrap values. The controller, Heather Meyer, was asked by Harvey Dent, the company's chief executive officer (CEO), to determine the appropriate treatment of the change in service life of the equipment. Heather determined that there has been an impairment of value requiring an immediate write-down of the equipment of $12,900,000. The remaining book value would then be depreciated over the equipment's revised service life. The CEO does not like Heather's conclusion because of the effect it would have on 2016 income. "Looks like a simple revision in service life from 10 years to 5 years to me," Dent concluded. "Let's go with it that way, Heather."

Required:
What is the difference in before-tax income between the CEO's and Heather's treatment of the situation? Discuss Heather Meyer's ethical dilemma.

Answer 1

The difference in before-tax income arises from the depreciation expense. Heather faces an ethical dilemma in manipulating the expense to satisfy the CEO's request.

Step-by-step explanation:

The difference in before-tax income between the CEO's and Heather's treatment of the situation is the result of the depreciation expense. Heather determined that there has been an impairment of value requiring an immediate write-down of the equipment, resulting in a higher depreciation expense. On the other hand, the CEO wants to revise the service life of the equipment, which would result in a lower depreciation expense. The difference in depreciation expense will directly impact the before-tax income of the company.

Heather's ethical dilemma arises from the CEO's request to manipulate the depreciation expense for superficial reasons. Heather has a professional responsibility to accurately report the financial statements and adhere to accounting standards. By going along with the CEO's request, Heather would compromise her professional integrity and potentially mislead investors, creditors, and other stakeholders.

Answer 2

Answer B but don’t take my word