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Aston Projected Income Statement YE 12/31/2014 Sales       29,000,000 COGS   $14,000,000   Depreciation expense   2,600,000   Operating Expense  ...

Aston Projected Income Statement

YE 12/31/2014
Sales       29,000,000
COGS   $14,000,000  
Depreciation expense   2,600,000  
Operating Expense   6,400,000   23,000,000
Income Before Tax       6,000,000
Tax Expense       3,000,000
Income After Taxes       3,000,000
ASTON CORPORATION SELECTED BALANCE SHEET INFORMATION
AT DECEMBER 31, 2012

Estimated cash balance       $5,000,000
Available-for-sale securities (at cost)       10,000,000
Fair value adjustment (1/1/12)       200,000
Estimated Fair Value at December 31st 2014

Security   Cost   Estimated Market
A   2,000,000   2,200,000
B   4,000,000   3,900,000
C   3,000,000   3,100,000
D   1,000,000   1,800,000
Total   10,000,000   11,000,000
Other Info As of December 31st 2014

Equiptment- $3,000,000

Accumulated Depreciation (5-Year SL)- 1,200,000

New Robotic Equiptment (Purchased 1/1/14)- 5,000,000

Accumulated Depreciation (5-year DDB)- 2,000,000

The corporation has never used robotic equipment before, and Warren assumed an accelerated method because of the rapidly changing technology in robotic equipment. The company normally uses straight-line depreciation for production equipment.
Aston explains to Warren that it is important for the corporation to show a $7,000,000 income before taxes because Aston receives a $1,000,000 bonus if the income before taxes and bonus reaches $7,000,000. Aston also does not want the company to pay more than $3,000,000 in income taxes to the government.

Instructions: answer the following A and B.

A)What can Warren do within GAAP to accommodate the president's wishes to achieve $7,000,000 in income before taxes and bonus? Present the revised income statement based on your decision.

B)2) are the actions ethical and who are the stake holders in this decision?

Business   Accounting   
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Homework Answers

Answer #1

PART A

The only option before Warren is to use straight line depreciation instead of the double declining balance method of depreciation for the robotic equipment. The depreciation under SL method would be $ 5,000,000 / 5 = $ 1,000,000 instead of $ 2,000,000.

Sheridan Corporation

Projected Income Statement

  • For the year ended December 31, 2017

    Sales 29,000,000
    Cost of Goods Sold 14,000,000
    Depreciation (2600000-2000000+1000000=16000000

    1,600,000
    Operating Expenses 6,400,000
    Income before Income Tax 22,000,000
    Profit 7000000

No the action was not ethcal as it wrongly inflated the profits.  

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