Question : a)What is the difference in before-tax income between the CFO\'s and
ID: 2448660 • Letter: Q
Question
Question :
a)What is the difference in before-tax income between the CFO's and the controller's treatment of the situation?
b)What are relevant accounting principles?
c)Do you have other options or suggestions?
d)Discuss your responsibilities along with the possible consequence of any action you might take?
You have recently been hired as the assistant controller for Horizon Corporation, a large public held computer manufacturer. Your immediate superior is the company controller, Jim Fielding, who in turn reports to the chief fnancial officer At the beginning of 2011, the Horizon Company purchased equipment for $42 million to be used in the manufacture of a new line of laptop computers. 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 2011 and 2012 Late in 2013, it became apparent that sales of the new laptop computer significantly below expectations. The company decided to continue production for two more years (2014 and 2015) and then discontinue the line. At that time, the equipment will be sold for minimal scrap value The controller, Jim Fielding, was asked by the company's chief financial officer (CFO), to determine the appropriate treatment of the change in service life of the equipment Jinm 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. But the CFO does not like Jim's conclusion because of the effect it would have on 2013 income. “Looks like a simple revision in service life from 10 years to 5 years to me." “Let's go with it that way, Jim."Explanation / Answer
a) Cost of Assets : 42 million
Depreciation : 42/10 = 4.2
Book Value in 2013 : (42 - 4.2-4.2) = 33.6 million
Revised depreciation : 33.6/ 3 = 11.20 million
As per CFO suggession depreciation will be : 11.20 million
As per controller: Impairement loss : (33.6-12.90) = 20.70
Depreciation (12.90/3) = 4.30
Total Expense for the year = 25.00
Difference in income before tax under CFO's and controller treatment (25.00 - 11.20) = 13.80
b) Cost Principle: The depreciation amount reported on balance sheet should be based on the historical cost of the assets. The total amount that can be recognised as depreciation should not exceed the cost of the assets
Matching principle. Assets cost to be allocated to depreciation over the life of the assets. It also means that the allocation of depreciation should match with revenue generated by the use of the assets.
c) Impairment can be claimed based on future earning capacity of assets. Analyse the inflow of cash from sale in the future year and compare it with book value ie 33.60 million. If future inflow is less than book value recognise impairment to that extent. Or
Change the depreciation method. ie depreciation based on production capacity. It is a change in method so it should be done retrospectivly. The effect of retrospective change should be reported current year.
d) As a person responsible for keeping books of accounts he should be well awear of accounting principles and practices. The method adopted shuold be consistant with accounting princple and suitable for nature of our business. Also the major changes are to be reported to CFO. Any decision will have a far reaching impact on comapny's net income and financial position. Also it have a major impact on company's tax liability.