Assume you are one of three membersof the accounting staff working for a small, private company. Atthe beginning of this year, the company expanded into a newindustry by acquiring equipment that will be used to make severalnew lines of products. The owner and general manager of the companyhave indicated that, as one of the conditions for providingfinancing for the new equipment, the company's bank willreceive a copy of the company's annual financial statements.Another condition of the loan is that the company's totalassets cannot fall below $250,000. Violation of this conditiongives the bank the option to demand immediate repayment of theloan. Before making the adjustment for this year'sdepreciation, the company's total assets are reported at$255,000. The owner has asked you to take a look at the factsregarding the new equipment and "work with the numbers tomake sure everything stays onside with the bank."
Adepreciation method has yet not been adopted for the new equipment.Equipment used in other parts of the company is depreciated usingthe double-declining-balance method. The cost of the new equipmentwas $35,000 and the manager estimates it will be worth "atleast $7,000" at the end of its four-year useful life.Because the products made with the new equipment are only beginningto catch on with consumers, the company used the equipment toproduce just 4,000 units this year. It is expected that, over allfour years of its useful life, the new equipment will make a totalof 28,000 units.
1. Calculate the depreciation thatwould be reported this year under the straight line, units ofproduction, and double declining balance methods. Present youranswers and calculations in a schedule on a separate sheet ofpaper.
2. Which of the three depreciationmethods would meet the owner's objective? Explain youranswer.
3. Evaluate and discuss whetherit is ethical to recommend that the company use the method yourecommended in #2.
4. What two parties are most directlyaffected by this recommendation?
5. Explain how each party would bebenefited or harmed by the recommendation?
6. Does the recommendation violate any laws or applicable rules? Justify your answer.
7. Indicate and explain any otherobservations and /or factors that you would consider before makinga recommendation.