CA11-5 (Depreciation Choice—Ethics) Jerry Prior, Beeler
Corporation’s controller, is concerned that net income may be lower this year.
He is afraid upper-level management might recommend cost reductions by laying
off accounting staff, including him.
Prior knows that depreciation is a major expense for Beeler.
The company currently uses the double- declining-balance method for both
financial reporting and tax purposes, and he’s thinking of selling equip- ment
that, given its age, is primarily used when there are periodic spikes in
demand. The equipment has a carrying value of $2,000,000 and a fair value of
$2,180,000. The gain on the sale would be reported in the income statement. He
doesn’t want to highlight this method of increasing income. He thinks, “Why
don’t I increase the estimated useful lives and the salvage values? That will
decrease depreciation expense and require less extensive disclosure, since the
changes are accounted for prospectively. I may be able to save
my job and those of my staff.”
Answer the following questions.
(a) Who are the
stakeholders in this situation?
(b) What are the ethical issues involved?
(c) What should Prior do?