Question

Alaska Airlines and United Continental are both passenger airline companies. Although they use similar assets to conduct their businesses, the estimated lives they use to depreciate their assets vary, as shown in the following table.


Managers have significant flexibility in setting the estimated useful lives of depreciable assets, and as the table shows, United Continental uses longer estimated lives for its assets than does Alaska Airlines.

Required
a. How does using a longer estimated life for a depreciable asset potentially affect its earnings?
b. Would using a longer estimated life for a depreciable asset be more likely to affect a company’s fixed or variable costs?
c. In the past, some companies, not United Continental, have been accused of deliberately overestimating the useful lives of their companies’ depreciable assets. Speculate as to what would cause them to do this.
d. Review the statement of ethical professional practice shown in Exhibit 1.15 of Chapter 1 and comment on which, if any, of the ethical standards are violated by deliberately overestimating the useful lives of depreciable assets.
e. Comment on the provisions of the Sarbanes–Oxley Act that are designed to prevent a company’s executives from deliberately overestimating the useful lives of depreciableassets.


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  • CreatedFebruary 07, 2014
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