Please help with the following:

Ethics Case 115

Asset impairment

LO118

At the beginning of 2022, the Healthy Life Food Company purchased equipment for $42 million to be used in the manufacture of a new line of gourmet frozen foods. The equipment was estimated to have a 10-year service life and no residual value. The straight-line depreciation method was used to measure depreciation for 2022 and 2023.

Late in 2024, it became apparent that sales of the new frozen food line were significantly below expectations. The company decided to continue production for two more years (2025 and 2026) and then discontinue the line. At that time, the equipment will be sold for minimal scrap values.

The (head accountant) controller was asked by the companys 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 an 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 equipments revised service life.

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. Lets go with it that way.

Required:

What is the difference in before-tax income between the CEOs and the controllers treatment of the situation?

Is GAAP more likely to require the controllers approach of impairment or the CEOs approach of change in estimate?

Ethics Case 116

Earnings management and accounting changes; impairment

LO115, LO116, LO118

Companies often are under pressure to meet or beat Wall Street earnings projections in order to increase stock prices and also to increase the value of stock options. Some resort to earnings management practices to artificially create desired results.

Required:

1) Do estimates by management affect the amount of depreciation in its companys financial statements?

2)

To increase earnings in the initial years following the purchase of a depreciable asset, would management (a) choose straight-line or double-declining balance, (b) estimate a longer or shorter service life, or (c) estimate a higher or lower residual value?

3) Are decisions of investors and creditors affected by accounting estimates?

4) Should a company alter depreciation estimates for the sole purpose of meeting expectations of Wall Street analysts?

Thank you for your help