Looks like asimple revision in service life from 10

  • Post University
  • INTERMEDIA 301
  • Notes
  • ProfessorResolveTarsier8602
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Looks like asimple 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 dilema. Year Impair Chg life 2009 $ 4,200,000 $ 4,200,000 2010 $ 4,200,000 $ 4,200,000 book value $ 20,700,000 $ 33,600,000 depreciation for remainder of life: 2011 $ 6,900,000 $ 11,200,000 2012 $ 6,900,000 $ 11,200,000 2013 $ 6,900,000 $ 11,200,000 before tax difference for 2011: impairment $ 12,900,000 deprec $ 6,900,000 $ 11,200,000 total $ 19,800,000 $ 11,200,000 Heather's dilemma is whether to take the bad news all at once or spread it over three years. Spreading the bad news would make the firm look bad three years in a row while a one-time big bath gets it over with all at once and rebounds the firm to a more profitable view. Proper disclosures can often reduce the dilemma by letting the reader know what happened and how the firm decided to handle the bad news. There is authoritative literature to help Heather come up with a solution without having it be "her opinion" only. Impairments are based on an assessment of whether the future cash
flows are lower than the book value. By doing this computation, Heather can get support for her decision of whether to impair or change the remaining useful life.

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