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:

$\text{Depreciation cost = }\frac{\left(\text{Cost of the asset}-\text{Residual value}\right)}{\text{Estimated useful life of the asset}}$

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.