Hard Bodies Co. is a fitness chain that has just completed its second year of operations. At the beginning of its first fiscal year, the company purchased fitness equipment at a cost of $600,000 and estimated that the equipment would have a useful life of five years and no residual value. The company uses the straight-line depreciation method. The company reported net income for the first two years of operations as follows: Net Income (Loss) Year $50,000 2 (2,000) Mike Gambit, the company's chief financial officer (CFO), has recently run financial models to predict future net income, and he expects net losses to continue at $(2,000) per year for the next three years. James Steed, the president of Hard Bodies, is concerned about these predic- tions, as he is under pressure from the company's owner to return the company to Year 1 net income levels. If the company does not meet these goals, both he and Mike will likely be fired. Mike suggests that the company change the estimated useful life of the fitness equipment to 10 years and increase the equipment's estimated residual value to $50,000. This will reduce depreciation expense and increase net income. Evaluate the decision to change the equipment's estimated useful life and 1. estimated residual value to improve earnings. How does this change impact the use- fulness of the company's net income for external decision makers? If Mike and James make the change, are they acting in an ethical manner? Explain. 2.
Hard Bodies Co. is a fitness chain that has just completed its second year of operations. At the beginning of its first fiscal year, the company purchased fitness equipment at a cost of $600,000 and estimated that the equipment would have a useful life of five years and no residual value. The company uses the straight-line depreciation method. The company reported net income for the first two years of operations as follows: Net Income (Loss) Year $50,000 2 (2,000) Mike Gambit, the company's chief financial officer (CFO), has recently run financial models to predict future net income, and he expects net losses to continue at $(2,000) per year for the next three years. James Steed, the president of Hard Bodies, is concerned about these predic- tions, as he is under pressure from the company's owner to return the company to Year 1 net income levels. If the company does not meet these goals, both he and Mike will likely be fired. Mike suggests that the company change the estimated useful life of the fitness equipment to 10 years and increase the equipment's estimated residual value to $50,000. This will reduce depreciation expense and increase net income. Evaluate the decision to change the equipment's estimated useful life and 1. estimated residual value to improve earnings. How does this change impact the use- fulness of the company's net income for external decision makers? If Mike and James make the change, are they acting in an ethical manner? Explain. 2.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Hard Bodies Co. is a fitness chain that has just completed its second year of operations.
At the beginning of its first fiscal year, the company purchased fitness equipment at a cost
of $600,000 and estimated that the equipment would have a useful life of five years and
no residual value. The company uses the straight-line depreciation method. The company
reported net income for the first two years of operations as follows:
Net Income (Loss)
Year
$50,000
2
(2,000)
Mike Gambit, the company's chief financial officer (CFO), has recently run financial models to
predict future net income, and he expects net losses to continue at $(2,000) per year for the
next three years. James Steed, the president of Hard Bodies, is concerned about these predic-
tions, as he is under pressure from the company's owner to return the company to Year 1 net
income levels. If the company does not meet these goals, both he and Mike will likely be fired.
Mike suggests that the company change the estimated useful life of the fitness equipment to
10 years and increase the equipment's estimated residual value to $50,000. This will reduce
depreciation expense and increase net income.
Evaluate the decision to change the equipment's estimated useful life and
1.
estimated residual value to improve earnings. How does this change impact the use-
fulness of the company's net income for external decision makers?
If Mike and James make the change, are they acting in an ethical manner? Explain.
2.
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