At the beginning of 2012, the Yummy 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 2012 and 2013.
Late in 2014, 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 (2015 and 2016) and then discontinue the line. At that time, the equipment will be sold for minimal scrap values.
The controller, Ben Miller, was asked by Jack Wilson, the company's CEO, to determine the appropriate treatment of the change in service life of the equipment. Heather 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 equipment's revised service life.
The CEO does not like Ben's conclusion because of the effect it would have on 2014 income. "Looks like a simple revision in service life from 10 years to 5 years to me," Jack concluded. "Let's go with it that way, Ben."
Required:
1. What is the difference in before-tax income between the CEO's and the controller's treatment of the situation?
2. Discuss the Controller's ethical dilemma. For example, what ethical dilemma does he face? Who may benefit from the CEO's action? Who may be harmed from the CEO's action? How are they likely to benefit or be harmed? What specific interests are in conflict? What are your options in dealing with the ethical dilemma you identified?