Mike is the controller of the Purdu Company (that you just partially completed a selected depreciation calculation under requirement #1 below). Mike is under pressure from the company's owner to return the company to Year 1 net income levels. Mike suggests that the company change the estimated useful life of the equipment from 3 years to 10 years under straight-line method, and increase the equipment's estimated residual (scrap) value to $50,000.

What to Do

Analyze the impact on net income to change the equipment's

estimated useful life (from 3 to 10 years),

estimated residual value to improve earnings (by increase the residual value to $50,000), and

changes in depreciation methods (from the straight-line depreciation to ??).

Note: Have you noticed I didn't give you asset cost in the prompt? I asked this question because it also mimics a theoretical question potentially asked. This is a skill you should have an can apply to any classes. All that you do need to do is to assume a missing variable to prove the multiple choices provided (in that hypothetical questions). So, just make up the asset cost, say $100,000, calculate depreciation, then analyze its impact (higher? lower?). Again, key: make assumption to prove the theory.

If Mike makes the change, but the impact is not enough. He remembers from his financial accounting instructor that the current year's income may change with the choice of inventory method. Explain how this may be accomplished?

Can we arbitrarily change the criteria on depreciation or inventory methods year-after-year? Is it allowed? is it ethical?