Solved: Hard Bodies Co is a fitness chain that has just

Hard Bodies Co is a fitness chain that has just

Hard Bodies Co. is a fitness chain that has just completed its second year of operations. At the
beginning of its first fiscal year, the company purchased fitness equipment at a cost of $600,000
and estimated that the equipment would have a useful life of five years and no residual value.
The company uses the straight-line depreciation method. The company reported net income for
the first two years of operations as follows:

Year Net Income (Loss)

1 .................................................... $50,000

2. .................................................... (2,000)

Mike Gambit, the company's chief financial officer (CFO), has recently run financial models to
predict future net income, and he expects net losses to continue at $(2,000) per year for the
next three years. James Steed, the president of Hard Bodies, is concerned about these
predictions, as he is under pressure from the company's owner to return the company to Year 1
net income levels. If the company does not meet these goals, both he and Mike will likely be
fired. Mike suggests that the company change the estimated useful life of the fitness equipment
to 10 years and increase the equipment's estimated residual value to $50,000. This will reduce
depreciation expense and increase net income.

1. Evaluate the decision to change the equipment's estimated useful life and estimated residual
value to improve earnings. How does this change impact the usefulness of the company's net
income for external decision makers?

2. If Mike and James make the change, are they acting in an ethical manner? Explain.

Hard Bodies Co is a fitness chain that has just

ANSWER
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