07 May HOW WOULD INCREASING THE DEPRECIATION PERIOD AFFECT AMERICAN MOVIEPLEX’S EARNINGS?
bruary 23, 2018 | No Comments
1.There are various types of accounting changes, each of which is required to be reported differently.
Required:
1. What type of accounting change is a change from the sum-of-years’- digits method of depreciation to the straight line method for previously recorded assets? Under what circumstances does the type of accounting change occur?
2. What type of accounting change is a change in the expected service life of an asset arising because of more experience with the asset? Under what circumstances does this type of accounting change occur?
2. American Movieplex, a large movie theater chain, leases most of its theater facilities. In conjunction with recent operating leases, the company spent $28 million for seats and carpeting. The question being discussed over breakfast on Wednesday morning was the length of the depreciation period for these leasehold improvements. The company controller, Sarah Keene, was surprised by the suggestion of Larry Person, her new assistant.
Keene: Why 25 years? We’ve never depreciated leasehold improvements for such a long period.
Person: I noticed that in my review of back records. But during our expansion to the Midwest, we don’t need expenses to be any higher than necessary.
Keene: But isn’t that a pretty rosy estimate of these assets’ actual life? Trade publications show an average depreciation period of 12 years.
Required:
1. How would increasing the depreciation period affect American Movieplex’s earnings?
2. Does revising the estimate pose an ethical dilemma?
3. Who would be affected if Person’s suggestion is followed?
3. Outdoors R Us owns several membership-based campground resorts throughout the Southwest. The company sells campground sites to new members, usually during get-acquainted visit and tour. The campgrounds offer a wider array of on-site facilities than most. New members sign a multiyear contract, pay a down payment, and make monthly installment payments. Because no credit check is made and many memberships originate on a spur-of-the-moment basis, cancellations are not uncommon.
Business has been brisk during its first three years of operations, and since going public in 2000, the market value of its stock has tripled. The first sign of trouble came in 2013 when the new sales dipped sharply.
One afternoon, two weeks before the end of the fiscal year, Diane Rice, CEO, and Gene Sun, controller, were having an active discussion in Sun’s office.
Sun: I’ve thought more about our discussion yesterday. Maybe something can be done about profits.
Rice: I hope so. Our bonuses and stock value are riding on this period’s performance.
Sun: We’ve been recording unearned revenues when new members sign up. Rather than recording liabilities at the time memberships are sold, I think we can justify reporting sales revenue for all memberships sold.
Rice: What will be the effect on profits?
Sun: I haven’t run the members yet, but let’s just say very favorable.
Required:
1. Why do you think liabilities had been recorded previously?
2. Is the proposal ethical?
3. Who would be affected if the proposal is implemented?
4. While doing some online research concerning a possible investment you come across an article that mention in passing that a representative of Morgan Stanley had indicated that a company’s pension plan had benefited its reported earnings. Curiosity piqued, you seek your old Intermediate Accounting test.
Required:
1. Can the net periodic pension cost cause a company’s reported earnings to increase? Explain.
2. Companies must report the actuarial assumptions used to make estimates concerning pension plans. Which estimate influences the earnings effect in requirement 1? Can any of the other estimates influence earnings? Explain.
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5. Bricker Graphics is a privately held company specializing in package labels. Representatives of the firm have just returned from Switzerland, where a Swiss firm is manufacturing a custom-made high speed, color labeling machine. Confidence is high that the new machine will help rescue Bricker from sharply declining profitability. Bricker’s chief operating officer, Don Benson, has been under fire for not reaching the company’s performance goals of achieving a rate of return on assets of at least 12%.
The afternoon of his return from Switzerland, Benson called Susan Sharp into his office. Susan is Bricker’s Controller.
Benson: I wish you had been able to go. We have some accounting issues to consider.
Sharp: I wish I’d been there, too. I understand the food was marvelous. What are the accounting issues?
Benson: They discussed accepting our notes at the going rate for a face amount of $12.5 million. We also discussed financing with stock.
Sharp: I thought we agreed; debt is the way to go for us now.
Benson: Yes, but I’ve been thinking. We can issue shares for a total of $10 million. The labeler is custom-made and doesn’t have a quoted selling price, but the domestic labelers we considered went for around $10 million. It sure would help our rate of return if we keep the asset base as low as possible.
Required:
1. How will Benson’s plan affect the return measure? What accounting issue is involved?
2. Is the proposal ethical?
3. Who would be affected if the proposal is implemented?
6. Generally accepted accounting principles should be applied consistently from period to period. However, changes within a company, as well as changes in the external economic environment, may force a company to change an accounting method. The specific reporting requirements when a company changes from one generally accepted inventory method to another depend on the methods involved.
Required:
Explain the accounting treatment for a change in inventory method (a) not involving LIFO, (b) from the LIFO method, and (c) to the LIFO method. Explain the logic underlying those treatments. Also, describe how disclosure requirements are designed to address the departure from consistency and comparability of changes in accounting principle.
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