Ethics Case 11–10 Asset impairment • LO11–8 At the beginning of 2016, the Healthy Life Food Company purchased equipment for $42 million to be used in the manufacture of a new line of gourmet frozen foods. The equipment was estimated to have a 10-year service life and no residual value. The straight-line depreciation method was used to measure depreciation for 2016 and 2017. Late in 2018, it became apparent that sales of the new frozen food line were significantly below expectations. The company decided to continue production for two more years (2019 and 2020) and then discontinue the line. At that time, the equipment will be sold for minimal scrap values. The controller, Heather Meyer, was asked by Harvey Dent, the company’s chief executive officer (CEO), to determine the appropriate treatment of the change in service life of the equipment. Heather determined that there has been an impairment of value requiring an immediate write-down of the equipment of $12,900,000. The remaining book value would then be depreciated over the equipment’s revised service life. The CEO does not like Heather’s conclusion because of the effect it would have on 2018 income. “Looks like a simple revision in service life from 10 years to 5 years to me,” Dent concluded. “Let’s go with it that way, Heather.” Required: 1. What is the difference in before-tax income between the CEO’s and Heather’s treatment of the situation? 2. Discuss Heather Meyer’s ethical dilemma.
Ethics Case 11–10 Asset impairment • LO11–8 At the beginning of 2016, the Healthy Life Food Company purchased equipment for $42 million to be used in the manufacture of a new line of gourmet frozen foods. The equipment was estimated to have a 10-year service life and no residual value. The straight-line depreciation method was used to measure depreciation for 2016 and 2017. Late in 2018, it became apparent that sales of the new frozen food line were significantly below expectations. The company decided to continue production for two more years (2019 and 2020) and then discontinue the line. At that time, the equipment will be sold for minimal scrap values. The controller, Heather Meyer, was asked by Harvey Dent, the company’s chief executive officer (CEO), to determine the appropriate treatment of the change in service life of the equipment. Heather determined that there has been an impairment of value requiring an immediate write-down of the equipment of $12,900,000. The remaining book value would then be depreciated over the equipment’s revised service life. The CEO does not like Heather’s conclusion because of the effect it would have on 2018 income. “Looks like a simple revision in service life from 10 years to 5 years to me,” Dent concluded. “Let’s go with it that way, Heather.” Required: 1. What is the difference in before-tax income between the CEO’s and Heather’s treatment of the situation? 2. Discuss Heather Meyer’s ethical dilemma.
Solution Summary: The author explains the difference between the CEO's and controller H’s calculation of income before tax.
At the beginning of 2016, the Healthy Life Food Company purchased equipment for $42 million to be used in the manufacture of a new line of gourmet frozen foods. The equipment was estimated to have a 10-year service life and no residual value. The straight-line depreciation method was used to measure depreciation for 2016 and 2017.
Late in 2018, it became apparent that sales of the new frozen food line were significantly below expectations. The company decided to continue production for two more years (2019 and 2020) and then discontinue the line. At that time, the equipment will be sold for minimal scrap values.
The controller, Heather Meyer, was asked by Harvey Dent, the company’s chief executive officer (CEO), to determine the appropriate treatment of the change in service life of the equipment. Heather determined that there has been an impairment of value requiring an immediate write-down of the equipment of $12,900,000. The remaining book value would then be depreciated over the equipment’s revised service life.
The CEO does not like Heather’s conclusion because of the effect it would have on 2018 income. “Looks like a simple revision in service life from 10 years to 5 years to me,” Dent concluded. “Let’s go with it that way, Heather.”
Required:
1. What is the difference in before-tax income between the CEO’s and Heather’s treatment of the situation?
ayco Inc. started its operations in 2022. Its sales during 2022, all on account, totalled $700,000. The company collected $500,000 in cash from customers during the year and wrote off $8,000 in uncollectible accounts. The company set up an allowance for doubtful accounts at December 31, 2022, its fiscal year-end, and determined the account balance to be $14,000.
The unadjusted balances of selected accounts at December 31, 2023 are as follows:
Accounts receivable
$
300,000
Allowance for doubtful accounts (debit)
10,000
Sales revenue (including 80 percent in sales on account)
800,000
Aging of the accounts receivable on December 31, 2023, resulted in an estimate of $11,000 in potentially uncollectible accounts.
Required:
1. Prepare the journal entries to record all the transactions during 2022 and post them to appropriate T-accounts. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)…
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