Question

Case Study HP Company is suffering declining sales of its medical products. The president, Toshio Nakao, instructs his controller, Satoshi Kasai, to lengthen asset lives to reduce depreciation expense. A processing line of medical equipment, purchased for $4 million in January 2020, was originally estimated to have a useful life of 5 years and a salvage value of $200,000. Depreciation has been recorded for 2 years on that basis. Nakao wants the estimated life changed to 10 years total and the straight-line method continued. Kasai is hesitant to make the change, believing it is unethical to increase net income in this manner. Nakao says, “The life is only an estimate, and I've heard that our competition uses a 12year life on their medical equipment.”

Instructions

(a) Who are the stakeholders in this situation?

(b) Is the proposed change in asset life unethical? Give your explanation.

(c) What is the effect of Nakao's proposed change on income before taxes in the year of change?

Answer 1

Answer 1:

a) the stakeholders are:

• Toshio Nakao - The President
• Satoshi Kasai - The Chief Financial Controller
• HP - The Company

Explanation

In any transaction, activity, business, project, or circumstance, any person (corporate or individual) who has an interest (that is, something to gain or lose) is considered a stakeholder.

Hence all the above-mentioned persons are stakeholders.

If the Company performs poorly, it shuts down. If the company shuts down, both the president and the controller will lose their jobs.

Answer 2:

B) The proposed change in asset life is unethical.

Step-by-step explanation:

First, we must assume that since the business operations are denominated in dollars, that it is a US-based company.

The useful life of the equipment is determined by IRS (Internal Revenue Service). According to its charts, the above-mentioned equipment should rightly be accorded a lifespan of 5 years.

Extending its useful life, therefore, is in violation of the IRS requirements and therefore unethical.

Answer 3

The proposed change will save the company a few thousand dollars in depreciation costs. But may cost more in fines due to breach of compliance and goodwill.

A more direct cost would the increased cost of maintenance if such equipment is used beyond the recommended useful life.

A Caveat: If the manufacturer has given a guaranty that extends the usefulness or efficiency of the equipment beyond 5 years and up to ten (which is highly unlikely) the Controller may have a case if questioned by the authorities.

Cheers