Straight line depreciation: (cost-residual) / Estimated Useful Life

$42,000,000 / 10 years = $4,200,000

Heather's Approach- 2013 write-down in the amount of $12,900,000

YearDepreciable BaseDepreciation RateAnnual Depreciation ExpenseAccumulated DepreciationBook Value2011$42,000,0001/10$4,200,000$4,200,000$37,800,0002012$42,000,0001/10$4,200,000$8,400,000$33,600,0002013$20,700,0001/3$6,900,000$28,200,000$13,800,0002014$20,700,0001/3$6,900,000$35,100,000$6,900,0002015$20,700,0001/3$6,900,000$42,000,000-

$20,700,000 / 3 = $6,900,000 new annual depreciation

CEO Approach:

YearDepreciable BaseDepreciation RateAnnual Depreciation ExpenseAccumulated DepreciationBook Value2011$42,000,0001/10$4,200,000$4,200,000$37,800,0002012$42,000,0001/10$4,200,000$8,400,000$33,600,0002013$33,600,0001/3$11,200,000$19,600,000$22,400,0002014$33,600,0001/3$11,200,000$30,800,000$11,200,0002015$33,600,0001/3$11,200,000$42,000,000-

$33,600,000 / 3 = $11,200,000 new annual depreciation

Heather's approach by implementing a write-down on the equipment would reduce 2013's net income by $8,600,000 compared to the CEO's approach. As a CEO, it is understandable why he is not in favor of this method because it may upset investors. Although lower net income does translate to a lower tax burden. Heather's treatment of this situation is ethically right because she found the opportunity to apply an impairment loss of the equipment purchased in 2011. An immediate write-down of asset must be accounted for while calculating the remaining life depreciation. Although the CEO does not like Heather's findings, it is ethically wrong for the CEO to obliviously overlook the need for a write-down in this situation. He might upset investors for one quarter or year, but if his unethical practices are ever made public, he will upset investors for the rest of his career.

Discuss Heather Meyer's ethical dilemma. Do you agree with the ethical perspectives of your classmates? What implications could this have on future Healthy Life Food Company dealings?