In February 2020, Small Business Inc. (SBI) borrowed funds to establish a second manufacturing facility.

• Purchase price = $2,500,000
• Cost to update/renovate the facility = $2,000,000
• Yearly insurance cost = $25,000
• Annual maintenance cost = $30,000

SBIs bank requires semi-annual financial statements so they can monitor borrowers financial health. The bank has warned SBI: if profits fall, the bank may raise the interest rate charged on the borrowed funds. This would be necessary to cover the increased risk involved in lending to a less profitable business.

SBI is concerned because a decrease in sales is occurring; the company believes a fall in profits is likely. They estimate this years sales will be $4,000,000. Operating expenses (excluding depreciation) are anticipated to be $3,000,000.

SBIs controller has decided to update the companys depreciation policy:

1. All asset additions should be depreciated for year in the year of acquisition and year in the year of disposal, regardless which month the purchase occurred.
2. The estimated useful life for buildings is 25 years.
3. The estimated salvage value is 10% of the initial building cost.

The previous depreciation policy stated:

1. Depreciation should be recorded to the nearest month (starting with the month of purchase).
2. The estimated useful life for a building is 20 years.
3. The estimated salvage value is $0.

Required:

1. Compute the straight-line depreciation under the old and new policies, for 2020 and 2021.
2. Provide estimated 2020 income statements, under the old and new policies
3. Is SBIs new policy unethical, or is it a legitimate decision/policy change? Consider information from the textbook and outside sources in developing your response.