Accounting Ethics: Safe Company
The safe organization bought machinery worth $54 million in 2017 for a new product line of medical safety. Through the application of straight-line depreciation techniques, the medical safety equipment has a lifespan of about ten years and with not any residual worth for both 2017 and 2018. It was resulting in an annual deprecation of $5.4 million over the two years, respectively. By the end of the second fiscal year of using the equipment, it was concluded that sales were underperforming; therefore, the decision was made only to utilize the equipment for an additional two years. Afterward, the equipment would be sold for scraps as of 2021, with an accumulated depreciation equal to $21.6 million.
After being asked by the CEO Amy Sullivan to ascertain the proper measure of the change in the machinery lifespan, Bob Best, the controller, established that the equipment had developed impairment causing its value to depreciate. It would require the management to write-down the anticipated value of the machinery to $12 million, with the rest of the equipment’s book value to depreciate over the revised lifespan. However, Sullivan would like to steer away from this conclusion because it will affect net income for 2019. Her proposal is to review the life span of the machinery from ten to five years in order to mitigate her concerns and show greater efficiency for management. The difference in income between the two situations would be $8 million, respectively; see below.
- Amy Sullivan recommendation expense for 2019; $14.4 million
- Bob Best recommendation expense for 2019; $22.4 million
Ethical dilemma faced by Bob Best
The ethical dilemma faced by Bob is that the CEO would like to review the equipment’s service life in order to produce a more favorable income figure for 2019. Going with the recommendation of the CEO means that there would be no accounting for the fact that at the end of 2019, the fair value of the asset has declined needing an impairment. Simply he can comply with the rules set out by GAAP, or he ignores those procedural practices to comply with the wishes of his boss (Duska et al., n.p). Furthermore, the individuals affected is widespread, additional employees, both investors and creditors, and customers are all affected by this situation and its outcome.
Employees more often than not wish to work for both an honest and ethical company that goes about business in the most professional ways possible. For investors and creditors, this could spark red flags as it is not a fair practice of the company’s assets and how it performs, which could lead to the loss of investor support or dwindling of credit available. The two courses of action that could occur are that Bob, the controller, continues with his method of the impairment and leaving the service life as is (Duska et al., n.p). On the other hand, he can go with the CEO’s plan to revise the service life; the implication will be a higher depreciation expense. Bob best should choose to do the write-down approach keeping the service life at ten years.
Recommendation of Controller
| Year | Item | Amount in millions | |
| 2017 | Purchase | 54 | |
| 2017 | Depreciation | 54/10= (5.4) | |
| 2018 | Depreciation | 54/10= (5.4) | |
| 2018 | Closing Balance | 54 – 10.8 = 43.2 | |
| 2019 | Impairment | (12) | |
| 2019 | Balance after impairment | 43.2 – 12 = 31.2 | |
| 2019 | Depreciation | 31.2/ 3 = (10.4) | |
| 2019 | Closing Balance | 31.2 – 10.4 = 20.8 | |
| 2019 | |||
| 2019 | Depreciation and Impairment Expenses | (-12 – 10.4) = -22.4 |
Recommendation of CEO
| Year | Item | Amount in millions | |
| 2017 | Purchase | 54 | |
| 2017 | Depreciation | 54/10= (5.4) | |
| 2018 | Depreciation | 54/10= (5.4) | |
| 2018 | Closing Balance | 54 – 10.8 = 43.2 | |
| 2019 | Deprecation | 43.2/3 = 14.4 | |
| 2019 | Closing Balance | 43.2 – 14.4= 28.8 | |
| 2019 |
| 2019 | Depreciation Expense | 14.4 |
Works cited
Duska, Ronald F., Brenda Shay Duska, and Kenneth Wm Kury. Accounting ethics. John Wiley & Sons, 2018.