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28 Jun 2021
HP Company is suffering declining sales of its medical products. The president, Toshio Nakao, instructs his controller, Satoshi Kasai, to lengthen asset lives to reduce depreciation expense. A processing line of medical equipment, purchased for $4 million in January 2020, was originally estimated to have a useful life of 5 years and a salvage value of $200,000. Depreciation has been recorded for 2 years on that basis. Nakao wants the estimated life changed to 10 years total and the straight-line method continued. Kasai is hesitant to make the change, believing it is unethical to increase net income in this manner. Nakao says, “The life is only an estimate, and I’ve heard that our competition uses a 12-year life on their medical equipment.”
HP Company is suffering declining sales of its medical products. The president, Toshio Nakao, instructs his controller, Satoshi Kasai, to lengthen asset lives to reduce depreciation expense. A processing line of medical equipment, purchased for $4 million in January 2020, was originally estimated to have a useful life of 5 years and a salvage value of $200,000. Depreciation has been recorded for 2 years on that basis. Nakao wants the estimated life changed to 10 years total and the straight-line method continued. Kasai is hesitant to make the change, believing it is unethical to increase net income in this manner. Nakao says, “The life is only an estimate, and I’ve heard that our competition uses a 12-year life on their medical equipment.”
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