Anderson Nuclear Power Plant will be \"mothballed\" at the end of its useful lif
ID: 2502597 • Letter: A
Question
Anderson Nuclear Power Plant will be "mothballed" at the end of its useful life (approximately 20 years) at great expense. The expense recognition principle requires that expenses be matched to revenue. Accountants Ana Alicia and Ed Bradley argue whether it is better to allocate the expense of mothballing over the next 20 years or ignore it until mothballing occurs.
After carefully reading and studying the chapter material, please respond to the following questions.
1. What ethical issues, if any, underlies the dispute?
2. What alternatives should be considered?
3. Assess the consequences of the alternatives.
4. What decision would you recommend?
Please answer all 4 question for points.
Explanation / Answer
The stakeholders are investors, creditors, etc.; i.e., users of financial statements, in both current and future periods.
1. What ethical issues, if any, underlies the dispute?
Ethical considerations will include honesty and integrity of financial reporting, job security, and the profit of the company.
2. What alternatives should be considered?
The two alternatives are applying expense recognition and applying the expense to the useful life of the plant, or not applying it and expensing the mothballing at a later date in the future.
3. Assess the consequences of the alternatives
The big thing to consider is whether or not the mothballing expense can be properly estimated, so that the expense recognized is accurately stated. The application of the expense recognition principle lowers profit today, for an expense that is years in the future. THis could cause job security issues and higher rates for consumers. Not applying the expense recognition principle results in inflated earnings, and higher job security.
4. What decision would you recommend?
Originally, I read that the expense was going to happen this year for a plant that was already expensed. However, in re-reading the answer I realize that this is an expense that will happen in the future. Therefore, I think that the company should get an estimate of the mothballing expense that will happen in the future, and accrue the expense over 20 years. this will more accurately state earnings.