Reference no: EM131044642

Case B: Russo Home Services

Russo Home Services cleans homes and businesses especially those with upholstered furniture and plie carpets. To remain competitive with like businesses, three years ago the company invested in some important equipment. Given this, it acquired 2 new vans and 2 “volcano” cleaners.

Acquisition         Asset                        Cost                     Estimated            Residual

Date                                                                                 Life                         Value

3/10/12            Van #1                      $24,000                 8 years                  $2,000

3/23/12             Van #2                     $22,000                 8 years                  $2,000

4/15/12        Volcano Cleaners        $100,000                8 years                  $2,000

Russo takes one half year’s depreciation in the year of acquisition and the year of disposal. It uses the straight line depreciation. Because of new information, Joanne Shaft, controller, has altered the estimated useful lives of the vans to 6 years and the cleaners to 5 years. Other changes are as follows:

Van 1 – Salvage value now $3,125

Van 2 – Salvage value now $-0-

Cleaners – Salvage value $5,000.

After revising the depreciation amounts for the current year’s statements (year ending April 30, 2015), Shaft was told by the CFO, Meg Cane, that the revision was significant enough to change the small profit projected for 2015 to a net loss. As a result, Cane has asked shaft to reduce by half the total depreciation expense for the year.

Requirements:

1. Calculate the net book values for each of the three assets owned by Russo Home Services as reported in the financial statements April 30, 2014.

2. Without considering Meg Cane’s directive, for Russo Home Services financial statements for the year ended April 30, 2015:

a. Calculate the revised depreciation expense.

b. Discuss the reporting and the disclosure requirements for depreciation.

3. Referring to the specific standards (competence, confidentiality, integrity, and credibility) from the IMA’s “Statement of Ethical Professional Practice” discuss the

a. Ethical conflicts that Meg Cane’s directive presents to Joanne Shaft.

 

b. Steps that shaft should take to resolve this situation.