(Accounting Changes) Plato Corporation performs year-end planning in November of each year before their calendar year ends in December. The preliminary estimated net income is $3 million. The CFO, Mary Sheets, meets with the company president, S. A. Plato, to review the projected numbers. She presents the following projected information.

The corporation has never used robatic equipment before, and Sheets assumed an accelerated method because of the rapidly changing technology in robotic equipment. The company normally uses straight-line depreciation for production equipment.
Plato explains to Sheets that it is important for the corporation to show an $8,000,000 net income before taxes because Plato receives a $1,000,000 bonus if the income before taxes and bonus reaches $8,000,000.
Plato also does not want the company to pay more than $3,000,000 in income taxes to the government.
Instructions

(a) What can Sheets do within GAAP to accommodate the president’s wishes to achieve $8,000,000 in income before taxes and bonus? Present the revised income statement based on your decision.

(b) Are the actions ethical? Who are the stakeholders in this decision, and what effect do Sheets’s actions have on their interests?

Transcribed Image Text:

PLATO CORPORATION PROJECTED INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 Sales Cost of goods sold Depreciation Operating expenses Income before income tax Income tax Net income $14,000,000 2,600,000 $29,000,000 6,400,000 23,000,000 6,000,000 3,000,000 $ 3,000,000