Question

2. Journalize the adjusting entries to record the amortization, depletion, of for each item. ojects CP 10-1 Ethics in Action Hard Bodies Co. is a fitness chain that has just completed its second year of opera At the beginning of its first fiscal year, the company purchased fitness equipment at a cos of $600.000 and estimated that the equipment would have a useful life of five years and no residual value. The company uses the straight-line depreciation method. The company reported net income for the first two years of operations as follows: Year Net Income (Loss) $50,000 2 (2,000) Mike Gambit, the company's chief financial officer (CFO), has recently run financial models to predict future net income, and he expects net losses to continue at $(2,000 per year for the next three years. James Steed, the president of Hard Bodies, is concerned about these predic- tions, as he is under pressure from the company's owner to return the company to Year 1 net income levels. If the company does not meet these goals, both he and Mike will likely be fired. Mike suggests that the company change the estimated useful life of the fitness equipment to 10 years and increase the equipment's estimated residual value to $50,000. This will reduce depreciation expense and increase net income. Evaluate the decision to change the equipment's estimated useful life and estimated residual value to improve earnings. How does this change impact the use fulness of the company's net income for external decision makers? - If Mike and James make the change, are they acting in an ethical manner? Explain CP 10-2 Ethics in Action Dave Elliott, CPA, is an assistant to the controller of Lyric Consulting Co. In time, Dave also prepares tax returns and performs general accounting services for Frequently, Dave performs these services after his normal working hours.us Consulting Co.'s computers and laser printers, Occasionally, Dave's clients will call ormal working hours, using Lyric ally, Dave's clients will call him at

Answer 1

Net impact on the company's Net Income if estimated useful life and the estimated residual value is changed

Loss for the year = ($ 2,000)

(+) Old Depreciation = $ 120,000

(-) New Depreciation = ($ 55,000)

New Estimated Income for the Year = $ 63,000

Old Depreciation = (Cost of Equipment - Salvage Value) / Old Estimated useful life

= ( $ 600,000 - 0 ) / 5 years = $ 120,000

New Depreciation = (Cost of Equipment - Salvage Value) / New Estimated useful life

= ( $ 600,000 - $ 50,000 ) / 10 years = $ 55,000

1. It is clearly stated from the above schedule and workings the Net Income of the company would be $ 63,000 if the company changes the estimated useful life and estimated salvage value of Equipment.

This change can impact the decision of external users as the company is showing Net Income instead of Loss. It can lead to a positive outlook for the company and they will make their decision on this perspective or outlook that the company is profit-making.

2.) Mike and James are not acting in an ethical manner if they make the above changes in the financial statement because they are violating the accounting principle of consistency which describes the need to follow one method or policy for years until the change is required for better presentation or compliance with Law. In this case, they are simply trying to save their jobs and to do so they are not following accounting principles and indulging in fraudulent activities which is unethical.