Acct 200 Critical Thinking Assessment

Fall 2021

Robert L. Browne is CFO of Western Resources, Inc. The company specializes in the exploration and development of natural gas. Its near year-end, and Robert is feeling terrific. Natural gas prices have risen throughout the year, and Western Resources is set to report record-breaking performance that will greatly exceed analysts expectations. However, during an executive meeting this morning, management agreed to tone down profits due to concerns that reporting excess profits could encourage additional government regulations in the industry, hindering future profitability.

On January 2 of the current year, the company purchased equipment for $10,500,000. The companys standard practice for equipment like this is to use straight-line depreciation over 12 years using an estimated residual value of $600,000. To address the issue discussed in the meeting, Robert is considering several options.

Option 1: Adjust the estimated service life of the equipment from 12 years to 6 years.

Option 2: Adjust the estimated residual value of the equipment from $600,000 to $0.

Option 3: Adjust the estimated service life of the equipment to 6 years and adjust the estimated residual value to $0.

Option 4: Switch to double-declining balance depreciation using an estimated service life of 12 years and $600,000 as the residual value.

Required:

1. Calculate annual depreciation using the companys standard practice.

2. Calculate annual depreciation for each of the four options and state whether the option would increase or decrease net income as compared to the companys standard practice.
3. Write a short memo to company management detailing the impact on the net income and recommending the method that best meets managements desired outcome for the year. Include in the memo any ethical considerations you think should be factored into the decision.