Buster Container Company is suffering from declining sales of its principal product, non-biodegradable plastic cartons. The president, Dennis Harwood, instructs his controller, Shelly McGlone, to lengthen asset lives to reduce depreciation expense (thus increasing net income). A processing line of automated plastic extruding equipment, purchased for $3.1 million in January 2010, was originally estimated to have a useful life of 8 years and a salvage value of $300,000. Depreciation has been recorded for 2 years on that basis. Dennis wants the estimated life changed to 12 years total, and the straight-line method continued. Shelly is hesitant to make the change, believing it is unethical to increase net income in this manner. Dennis says, “Hey, the life is only an estimate, and I’ve heard that our competition uses a 12-year life on their production equipment.”
- Who are the stakeholders in this situation?
- Is the change in asset life unethical, or is it simply a good business practice by an astute president? Discuss in detail.