Ethical issues, FASB statement no:2, good will
1. Finney Container Company is suffering declining sales of its principal product, non-biodegradable plastic cartons. The president, Philip Shapeero, instructs his controller, Sharon Fetters, to lengthen asset lives to reduce depreciation expense. A processing line of automated plastic extruding equipment, purchased for $2.7 million in January 2002, was originally estimated to have a useful life of 8 years and a salvage value of $300,000. Depreciation has been recorded for 2 years on that basis. Philip wants the estimated life changed to 12 years total, and the straight-line method continued. Sharon is hesitant to make the change, believing it is unethical to increase net income in this manner. Philip says, "Hey, the life is only an estimate, and I've heard that our competition used a 12-year life on their production equipment."
Is the change in asset life unethical, or is it simply a good business practice by an astute president? What would you do if you were the controller?
2. Why is goodwill no longer amortized? Do you think goodwill should be amortized? Why or why not?
3. Waveland Corporation's research and development department has an idea for a project it believes will culminate in a new product that would be very profitable for the company. Because the project will be very expensive, the department requests approval from you, the company controller.
You recognize that corporate profits have been down lately and are hesitant to approve a project that will incur significant expenses that cannot be capitalized due to the requirement of FASB Statement No. 2. You know that if an outside firm is hired to do the work and a patent is obtained for the process, Waveland Corporation can purchase the patent from the outside firm and record the expenditure as an asset. You know that the company's own R&D department is first-rate and are confident that they can do the work well.
Who are the stakeholders in this situation? What are the ethical issues involved? What would you do?
Please post references.
The solution contains the ethical issues invloved in the change of life of the asset by president, accounting of Reasearch and development expenditure, why good will can not be amortised under new rule.
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