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At the beginning of 2022 , the Healthy Life Food Company purchased equipment for $42million to be used in the manufacture of a new line
At the beginning of 2022 , the Healthy Life Food Company purchased equipment for $42million to be used in the manufacture of a new line of gourmet frozen foods. The equipment was estrmated to have a 10 year service life and no residual value The straight line depreciation method was used to mearure depteciation for 2022 and 2023 Late in 2024, it became opparent that sales of the new frozen food line were significantly below expectations. The company decided to continue producton for two more years (2025 and 2026) and then discontinue the fine. At that time, the equipment will be sold for minimal scrap values: The (head accountant) controller was asked by the company's chief executive officer (CEO) to determine the appropriate treatment of the change in service life of the equipment. The controller determined that there has been on impairment of value requiring an immediate write-down of the equipment of $12,900,000. The remaining book value would then be depreciated over the equipment's revised service lfe The CEO does not like this conclusion because of the effect it would have on 2024 income. "Looks like a simple revision in service life from 10 years to 5 years to me, the CEO concluded. "Let's go with it that way" Required: 1. What is the difference in before-tax income between the CEO's and the controller's treatment of the situation? Note: Enter your onswers in whole dollors, and not in millions. 2 is GAAP more likely to require the controller's approach of impairment or the CEO's approach of change in estimate
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