Saul Sellers is the Chief Accountant for Bright Day Cafe (BDC) and is close to retirement. Traditionally, BDC provides a retirement plan that pays a bonus equal to 10 percent of the net income the restaurant reports in the year of retirement. BDC has just undertaken a remodeling project that involved the purchase of a significant amount of long-term assets. Saul is concerned that the depreciation associated with the new assets will reduce the company’s income, thereby reducing his retirement bonus. 

Saul’s friend, William, tells him to reduce the impact on income by adjusting the estimates of the useful lives and salvage values of the new assets. Saul knows he has the ability to manipulate the company’s income, but is concerned that intentionally misrepresenting the useful life and salvage value is at best unethical and may even be illegal. Even so, he believes it is unfair for his retirement to be diminished simply because the restaurant has decided to remodel in the year he retires.

Required
a. How will net income be affected if Saul overstates the useful life of the asset?
b. How will net income be affected if Saul understates the useful life of the asset?
c. How will net income be affected if Saul overstates the salvage value of the asset?
d. How will net income be affected if Saul understates the salvage value of the asset?
e. Deliberately misrepresenting the useful life or salvage value would violate which provisions of the Code of Professional Conduct (summarized in Exhibit 2.7).
f. Comment on how Saul’s decision could be influenced by the components of the fraud triangle. (It will be helpful to review the Chapter 2 content on the fraud triangle.)
g. What is the maximum criminal penalty required if Saul falsely certifies the company’s financial reports? (Reviewing the content in Chapter 2 pertaining to the Sarbanes–Oxley Act will help answer the question.)