ACC 308 Module 3.docx - Hello class CEOu2019 s Approach...

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Hello class,CEO’ s Approach Cost of Equipment $ 42,000,000Previous annual depreciation $4,200,000($42,000,000/ 10 years)Depreciation for 2011 and 2012$ (8,400,000)($4,200,000 x 2)Book Value$ 33,600,000Estimated remaining life from 2013 to 2015Divide by 3New estimated annual depreciation $ 11,200,000The income for 2013 contains the depreciation expense of $11,200,000 only. Heather’s ApproachCost of Equipment $ 42,000,000Previous annual depreciation ($42,000,000/10 years)$4,200,000Depreciation for 2011 and 2012$ (8,400,000)($4,200,000 x 2)Book Value $ 33,600,000Write-Down $ 12,900,000New depreciable base$ 20,700,000Estimated remaining life from2013 to 2015Divide by 3
New estimated annual depreciation $ 6,900,000The income for 2013 would contain the depreciation expense of $6,900,000 and the write-down of $12,900,000, which would create a total income reduction of $19,800,000. As you can see, Heather’s approach for the income of 2013 would be lower than CEO’s approach by $8,600,000. Thus, the difference in before-tax income between the CEO’s and Heather’s treatment of the situation would be $8,600,000. ($19,800,000 - $11,200,000 = $8,600,000). Heather’s ethical dilemma is based on whether she should record the service impairment as a

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