Furniture.com uses automated shipping equipment. Assume that early in year 1, Furniture purchased equipment at a cost of $400,000. Management expects the equipment to remain in service for five years, with zero residual value. Furniture uses straight-line depreciation. Furniture’s CEO informs the controller to expense the entire cost of the equipment at the time of purchase because Furniture’s profits are too high.
Requirements
1. Compute the overstatement or understatement in the following items immediately after purchasing the equipment:
a. Equipment
b. Net income
2. Is there an ethical violation? What should the controller do?