Use the following information to answer questions 5-7.
Blue Bird Bus Company is suffering declining sales of its principal product, school buses. The bank has threatened to call due a note if the company’s net income declines next year. The president, Joe Blow, talks to his controller, Ed Meek, and suggests that if net income declines Ed will not receive his annual bonus and may even lose his job. Joe suggests that Ed lengthen the useful lives of the production equipment from 10 years to 15 years for depreciation purposes and to continue to use the straight line method. The next day, Ed Meek informs the president he has made the changes in the depreciation schedules for the upcoming year.
QUESTION 5
What would be the effect on Blue Bird's depreciation expense if the useful life of the production equipment was increased from 10 to 15 years?
a. The increased life would cause the depreciation expense to increase.
b. The increased life would cause the depreciation expense to decrease.
c. The increased life would have no effect on the depreciation expense.
d. There is not enough information to determine if there would be an effect.
QUESTION 6
What would be the effect on Blue Bird's net income if the useful life of the production equipment was increased from 10 to 15 years?
a. The increased life would cause the net income to increase.
b. The increased life would cause the net income to decrease.
c. The increased life would have no effect on the net income.
d. There is not enough information to determine if there would be an effect.
QUESTION 7
What do you think of the president's ethical behavior as it relates to this situation?
a. It may be unethical for the president to threaten the controller with losing his bonus and potentially his job.
b. It may be considered unethical for the president to manipulate the useful life of assets.
c. Both statements might be considered to be unethical.
d. Neither statement would ever be considered to be unethical.
QUESTION 5:
To determine the effect on Blue Bird's depreciation expense if the useful life of the production equipment was increased from 10 to 15 years, we need to understand the relationship between useful life and depreciation expense. Depreciation is calculated by dividing the cost of an asset by its useful life.
If the useful life is increased from 10 to 15 years, the depreciation expense per year would decrease. This is because the same cost is now being spread over a longer period, resulting in smaller annual depreciation expenses.
Therefore, the correct answer is (b) The increased life would cause the depreciation expense to decrease.
QUESTION 6:
To determine the effect on Blue Bird's net income if the useful life of the production equipment was increased from 10 to 15 years, we need to understand the impact of depreciation expense on net income. Depreciation expense is subtracted from revenues to calculate net income.
If the depreciation expense decreases due to the increased useful life of the production equipment, the net income would increase. This is because a lower depreciation expense would result in higher net income.
Therefore, the correct answer is (a) The increased life would cause the net income to increase.
QUESTION 7:
This question is subjective, and the answer depends on personal values and opinions. However, I can provide some analysis to help you form your own opinion.
In this situation, the president is threatening the controller with the loss of his bonus and job if the net income declines. This could be seen as unethical because it puts pressure on the controller to manipulate the financial statements to avoid negative consequences for himself.
Additionally, the president suggests changing the useful life of assets to manipulate the depreciation expense. This can be considered unethical as it distorts the financial statements and misrepresents the true value of the assets.
Considering these factors, both statements (a) and (b) may be considered unethical.
Therefore, the correct answer is (c) Both statements might be considered to be unethical.