CA11-5 (Depreciation Choiceâ€”Ethics) Jerry Prior, Beeler Corporationâ€™s controller, is concerned that net income may be lower this year. He is afraid upper-level management might recommend cost reductions by laying off accounting staff, including him.
Prior knows that depreciation is a major expense for Beeler. The company currently uses the double- declining-balance method for both financial reporting and tax purposes, and heâ€™s thinking of selling equip- ment that, given its age, is primarily used when there are periodic spikes in demand. The equipment has a carrying value of $2,000,000 and a fair value of $2,180,000. The gain on the sale would be reported in the income statement. He doesnâ€™t want to highlight this method of increasing income. He thinks, â€œWhy donâ€™t I increase the estimated useful lives and the salvage values? That will decrease depreciation expense and require less extensive disclosure, since the changes are accounted for prospectively. I may be able to save
my job and those of my staff.â€
Answer the following questions.
(a) Who are the stakeholders in this situation?
(b) What are the ethical issues involved?
(c) What should Prior do?