On May 31, 2012, Overnight It, the overnight shipper, had total assets of $22,000,000,000 and total liabilities of $10,000,000,000. Included among the assets were property, plant, and equipment with a cost of $15,000,000,000 and accumulated depreciation of $8,000,000,000. During the year ended May 31, 2012, Overnight It earned total revenues of $36,000,000,000 and had total expenses of $34,000,000,000, of which $5,000,000,000 was depreciation expenses. The CFO and the controller are concerned that the results of 2012 will make investors unhappy. Additionally, both hold stock options to purchase shares at a reduced price, so they would like to see the market price continue to grow. They decide to “extend” the life of assets so that depreciation will be reduced to $3,000,000,000 for 2012.
Requirements
1. What is the change to net income due to their decision?
2. What appears to be their motivation for the change in asset lives? Is this ethical? Explain.