Question
Forum Cinemas, a large movie theater chain, leases most of its theater facilities. In conjunction with recent operating leases, the company spent $28 million for
Forum Cinemas, a large movie theater chain, leases most of its theater facilities. In conjunction with recent operating leases, the company spent $28 million for seats and carpeting. The question being discussed over breakfast on Wednesday morning was the length of the depreciation period for these leasehold improvements. The company controller, Tina Kelly, was surprised by the suggestion of Jared Percy, her new Chief Financial Officer.
Kelly: Why 25 years? We've never depreciated leasehold improvements for such a long period.
Percy: Inoticed that in my review of back records. But during our expansion to the Midwest, we don't need expenses to be any higher than necessary.
Kelly: But isn't that a pretty rosy estimate of these assets' actual life? Trade publications show an average depreciation period of 12 years.
Required:
- How would increasing the depreciation period affect Forum Cinemas' earnings?
- Does revising the estimate pose an ethical dilemma?If it does, describe the dilemma.If not, why not?
- What position, department or outside parties would be affected if Percy's suggestion were followed?
- If you were Kelly, what would you say to Percy?
- (Optional) Are there any citations in the FASB Codifications that could support your position?
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