Straight-line Depreciation : Under the straight-line method of depreciation, the same amount of depreciation is allocated every year over the estimated useful life of an asset. The formula to calculate the depreciation cost of the asset using the residual value is shown as below: Depreciation cost = ( Cost of the asset − Residual value ) Estimated useful life of the asset To evaluate: the decision to change the equipment’s estimated useful life and estimated residual value to improve earnings.

Question

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…

Answer 1

Question

Chapter 9, Problem 9.1TIF

(a)

To determine

Straight-line Depreciation: Under the straight-line method of depreciation, the same amount of depreciation is allocated every year over the estimated useful life of an asset. The formula to calculate the depreciation cost of the asset using the residual value is shown as below:

Depreciation cost = (Cost of the asset−Residual value)Estimated useful life of the asset

To evaluate: the decision to change the equipment’s estimated useful life and estimated residual value to improve earnings.

To determine

To explain: the impact of the change on the usefulness of the company’s net income for external decision makers.

(b)

To determine

To explain: whether Mr. M and Mr. J are acting in an ethical manner.

Expert Solution & Answer

Trending nowThis is a popular solution!

See solution

Check out sample textbook solution

Students have asked these similar questions

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…

Subscribe 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 brightspa 1 2 $50,000 (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, concerned about these predictions, 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…

On the first day of its fiscal year, Spearhead Company purchased a new computer systemfor a total cost of $50,000. The computer system is expected to have a life of 5 years witha residual value of $5,000. If the company uses the double-declining-balance method, itsdepreciation expense for this computer system in the first year will bea. $9,000.b. $10,000.c. $18,000.d. $20,000.