Luca Hanson owns Luca's Limousine, which operates a fleet of limousines and shuttle buses. Upon reviewing the

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Luca Hanson owns Luca's Limousine, which operates a fleet of limousines and shuttle buses. Upon reviewing the most recent financial statements, he became confused over the recent decline in net income. He called his accountant and asked for an explanation. The accountant told Luca that the numerous repairs and maintenance expenses such as oil changes, cleaning, and minor engine repairs had totaled up to a large amount. Further, because several drivers were involved in accidents, the fleet insurance premiums had also risen sharply. Luca told his accountant to simply capitalize all the expenses related to the vehicles rather than expensing them. These capitalized repair costs could then be depreciated over the next 10 to 20 years. By capitalizing those expenses, the net income would be higher, as would property and equipment assets; therefore, both the income statement and balance sheet would look better. His accountant, however, disagreed because the costs were clearly routine maintenance and because they did not extend the fleet's useful life. Luca then told his accountant that the estimated useful life of the vehicles needed to be changed from 5 years to 15 years to lower the amount of depreciation expense. His accountant responded that capitalizing costs that should be expensed and extending the estimated lives of assets just to increase the reported net income was unethical and wrong. Luca said that it was his business and therefore demanded that the financial statements be changed to show more net income. As a result, the accountant told Luca to pick up his files and find another accountant. What ethical concerns did the accountant have? If the total amount of repairs and maintenance was so large, couldn't a case be made that the amount should be capitalized? Is it unethical to change the estimated life of an asset? Was it unethical for the accountant to sever the business relationship? Do you have any suggestions?

Financial Statements
Financial statements are the standardized formats to present the financial information related to a business or an organization for its users. Financial statements contain the historical information as well as current period’s financial...
Balance Sheet
Balance sheet is a statement of the financial position of a business that list all the assets, liabilities, and owner’s equity and shareholder’s equity at a particular point of time. A balance sheet is also called as a “statement of financial...
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Financial Accounting

ISBN: 978-0134436111

4th edition

Authors: Robert Kemp, Jeffrey Waybright

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