Chapter 15, Problem 15.3BYP

Ethics Case 15–3

Leasehold improvements

• LO15–3

American Movieplex, a large movie theater chain, leases most of its theater facilities. In conjunction with recent operating leases, the company spent $28 million for seats and carpeting. The question being discussed over breakfast on Wednesday morning was the length of the depreciation period for these leasehold improvements. The company controller, Sarah Keene, was surprised by the suggestion of Larry Person, her new assistant.

Keene: Why 25 years? We’ve never depreciated leasehold improvements for such a long period.

Person: I noticed that in my review of back records. But during our expansion to the Midwest, we don’t need expenses to be any higher than necessary.

Keene: But isn’t that a pretty rosy estimate of these assets’ actual life? Trade publications show an average depreciation period of 12 years.

Required:

1. How would increasing the depreciation period affect American Movieplex’s earnings?

2. Does revising the estimate pose an ethical dilemma?

3. Who would be affected if Person’s suggestion is followed?