Analyzing Receivables and Long-Lived Assets

A company is experiencing lower than expected sales. The company’s executives agreed that in order to make up some of the lost revenue’s impact on the bottom line, expenses must be lower. One of the expenses to reduce was equipment that was purchased for $4,400,000 two years ago and which was estimated to have a useful life of eight years and a salvage value of $400,000. The company uses straight line deprecation, therefore, the company has recorded accumulated depreciation of $1,000,000 to date.

The executives want the estimated useful life changed from eight to 12 years so that depreciation expense will be reduced. The argument is that the useful life was just an estimate and by changing it the company can be aligned with the industry since some competitors in the industry also use 12 years’ useful life.

• Identify the stakeholders in the case.
• Determine whether the proposed change in assets’ useful life is unethical or good business practice.
• Determine the effects of executives’ proposed changes on the income before taxes for the year of proposed change.
• State what you would do if you were in charge of making the change

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