Reference no: EM132723839

Problem - ABC Container Company has declining sales of its principal product, non-biodegradable plastic cartons. The President, Joseph Stanton, instructs his controller to lengthen the estimated assets lives in order to reduce the amortization expense and increase net income.

A processing line of automated plastic extruding equipment, purchased for $2.7 million in January 2017, was originally estimated to have a useful life of five years and a residual value of $300,000. Amortization has been recorded for two years on that basis. The president wants its estimated useful life changed to eight years (total), and continued use of the straight-line method. The controller is hesitant to make the change, believing it is unethical to increase net income in this manner. The president says, "Hey, the useful life is only an estimate. Besides, I've heard that our competition uses an eight-year estimated life on its production equipment."

Required -

a) Who are the stakeholders in this situation? Identify and explain why.

b) Is the suggested change in asset life unethical, or simply a shrewd business practice by an astute president?

c) What is the effect of the president's proposed change on net income in the year of the change?