Imporia Container Ltd. is suffering from declining sales of its main product, non-biodegradable plastic cartons. 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 2013. The equipment was originally estimated to have a useful life of five years and a residual value of $200,000 and straight-line 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 in order to reduce the annual depreciation expense.
Yeoh Siew is hesitant to make the change, believing it inappropriate to "manage" profits in this way. Benny says, "I'm under a lot of pressure from the shareholders to maximize profits. Don't you want your bonus, which is based on profit, to be as high as possible? Just go ahead and make the change-the useful life and residual value are only an estimate, anyway."
Instructions
(a) Who are the stakeholders in this situation?
(b) Will Benny Benson's proposed change increase, decrease, or not affect profit in 2014? 2015?
(c) What impact will the proposed change in useful life and residual value have on the company's profit margin and asset turnover ratios?
(d) Discuss whether the proposed change described above are unethical or simply a good business practice by an astute president.