Aston Corporation performs year-end planning in November of each year before its calendar year ends in December. The preliminary estimated net income
Aston Corporation performs year-end planning in November of each year before its calendar year ends in December. The preliminary estimated net income is $3 million. The CFO, Rita Warren, meets with the company president, J. B. Aston, to review the projected numbers. She presents the following projected information.
\r\nPretax Income
\r\nPercentage-of-Completion Completed-Contract
\r\nPrior to 2014 $150,000 $105,000
\r\n2014 60,000 20,000
\r\nASTON CORPORATION
\r\nPROJECTED INCOME STATEMENT
\r\nFOR THE YEAR ENDED DECEMBER 31, 2014
\r\nSales $29,000,000
\r\nCost of goods sold $14,000,000
\r\nDepreciation 2,600,000
\r\nOperating expenses 6,400,000 23,000,000
\r\nIncome before income tax 6,000,000
\r\nIncome tax 3,000,000
\r\nNet income $ 3,000,000
\r\nASTON CORPORATION
\r\nSELECTED BALANCE SHEET INFORMATION
\r\nAT DECEMBER 31, 2014
\r\nEstimated cash balance $ 5,000,000
\r\nAvailable-for-sale securities (at cost) 10,000,000
\r\nFair value adjustment (1/1/14) —0—
\r\nEstimated fair value at December 31, 2014:
\r\nSecurity Cost Estimated Fair Value
\r\nA $ 2,000,000 $ 2,200,000
\r\nB 4,000,000 3,900,000
\r\nC 3,000,000 3,100,000
\r\nD 1,000,000 1,800,000
\r\nTotal $10,000,000 $11,000,000
\r\nOther information at December 31, 2014:
\r\nEquipment $3,000,000
\r\nAccumulated depreciation (5-year SL) 1,200,000
\r\nNew robotic equipment (purchased 1/1/14) 5,000,000
\r\nAccumulated depreciation (5-year DDB) 2,000,000
\r\nThe corporation has never used robotic equipment before, and Warren assumed an accelerated method because of the rapidly changing technology in robotic equipment. The company normally uses straightline depreciation for production equipment. Aston explains to Warren that it is important for the corporation to show a $7,000,000 income before taxes because Aston receives a $1,000,000 bonus if the income before taxes and bonus reaches $7,000,000.
\r\nAston also does not want the company to pay more than $3,000,000 in income taxes to the government.
\r\nInstructions
\r\n(a) What can Warren do within GAAP to accommodate the president’s wishes to achieve $7,000,000 in income before taxes and bonus? Present the revised income statement based on your decision.
\r\n(b) Are the actions ethical? Who are the stakeholders in this decision, and what effect do Warren’s actions have on their interests?