Imporia Container Ltd. is suffering from declining sales of its main product, non-biodegradable plastic car- tons. The president, Benny Benson, instructs his controller, Yeoh Siew Hoon, to change estimates relating to a processing line of automated plastic extruding equipment, purchased for $3 million in January 2010. The equipment was originally estimated to have a useful life of five years and a residual value of $200,000 and depreciation has been recorded for two years on that basis. Benny wants the estimated useful life changed to a total of seven years and the residual value raised to $500,000. Yeoh Siew is hesitant to make the change, believing it inappropriate to “manage profits” in this way. Benny says, “Hey, the useful life is only an estimate, and I’ve heard that our competition uses a six-year life on their production equipment. By the way, four of the six buildings we own have probably fallen in value this year. Because of the cost basis of accounting we don’t have to write them down but the other two buildings have gone up in value so let’s use IFRS rules to record a gain on them.”
Instructions
(a) Who are the in this situation?
(b) Will Benny Benson’s proposed changes increase or decrease profit in 2012?
(c) What impact will the proposed
(1) Change in useful life,
(2) Reporting buildings at fair value have on the company’s profit margin and asset turnover?
(d) Discuss whether the proposed changes described above are unethical or simply a good business practice by an astute president.
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