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Question on Leasehold improvements: Ethics Case American

Question on Leasehold improvements: Ethics Case

American Movieplex, a large movie theater chain, leases most of its theater facilities. In conjunction with recent operating leases, the company spent $28 million for seats and carpeting. The question being discussed over breakfast on Wednesday morning was the length of the depreciation period for these leasehold improvements. The company controller, Sarah Keene, was surprised by the suggestion of Larry Person, her new assistant.

Keene: Why 25 years? We've never depreciated leasehold improvements for such a long period.
Person: I noticed that in my review of back records. But during our expansion to the Midwest, we don't need expenses to be any higher than necessary.
Keene: But isn't that a pretty rosy estimate of these assets' actual life? Trade publications show an average depreciation period of 12 years.

Questions I need help with: Any help would be greatly appreciated.
1. How would increasing the depreciation period affect American Movieplex's income?
2. Does revising the estimate pose an ethical dilemma?
3. Who would be affected if Person's suggestion is followed?

Solution Preview

1. How would increasing the depreciation period affect American Movieplex's income?

--If the theater depreciates an asset for $28 million for 12 years, and for reasons of simplicity, we'll assume straight-line depreciation, the depreciation expense per year would be $2,333,333 per year for each of the twelve years. If the theater depreciates it over 25 years, the depreciation amount would be $1,120,000, because we're extending the number of years. The higher the depreciation expense, the higher it makes total expenses. Even though depreciation is considered a non-cash expense, it affects the total expenses and the income statement the same as the other expenses. A higher ...

Solution Summary

Question on Leasehold improvements: Ethics Case

American Movieplex, a large movie theater chain, leases most of its theater facilities. In conjunction with recent operating leases, the company spent $28 million for seats and carpeting. The question being discussed over breakfast on Wednesday morning was the length of the depreciation period for these leasehold improvements. The company controller, Sarah Keene, was surprised by the suggestion of Larry Person, her new assistant.

Keene: Why 25 years? We've never depreciated leasehold improvements for such a long period.
Person: I noticed that in my review of back records. But during our expansion to the Midwest, we don't need expenses to be any higher than necessary.
Keene: But isn't that a pretty rosy estimate of these assets' actual life? Trade publications show an average depreciation period of 12 years.

Questions I need help with: Any help would be greatly appreciated.
1. How would increasing the depreciation period affect American Movieplex's income?
2. Does revising the estimate pose an ethical dilemma?
3. Who would be affected if Person's suggestion is followed?

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