Answer:
a) The Common stockholder are the stakeholders
b) It is good business practice and ethical
c) $200,000 increase in income before tax
d) Advise the stakeholders based on the calculations made and effect on profit before tax.
Explanation:
The Question is divided into 4 parts and each will be answered as follows
<u>a) Identify the stakeholders in the case:</u> The stakeholders in such a case are the common stock holders.
The objective of any organization as well as its board of executives is to maximize the wealth of the stakeholders or shareholders. As such, any drag in sales will impact profit and lower profit means lower dividend or interest for stakeholders. Any decision taken therefore, will affect the common stock holders the most.
b) <u>Determine whether the proposed change in assets’ useful life is unethical or good business practice?
</u>
The ethical nature of the proposed change in assets' useful life is based on how it affects industry practice
Since, its proposal will lead to the company's alignment with industry standard and practices, it means it is ethical and in line with good business practice
Furthermore, since it will lead to an increase in the company's dragging profits, then the common stock holders and every other stakeholder in the organization will have restored confidence in the company. Hence, it is both ethical and good business practice.
c<u>) Determine the effects of executives’ proposed changes on the income before taxes for the year of proposed change?
</u>
Initial Depreciation/year ($4,400,000-$400,000)/ 8 $500,000
The proposed Depreciation ($300,000)
($4,400,000-$1,000,000-$400,000)= $3,000,000
$3,000,000/ (12 -2 years)= $300,000
The difference $200,000
This difference represents an increase in income before tax is deducted
d)<u> State what you would do if you were in charge of making the change.
</u>
I will primarily advise the stakeholders based on the options available as follows:
If profitability is paramount, in order to ensure that stakeholders enjoy maximized wealth then, we should take the decision to change the depreciation estimates.
Of course, there is also the need to remind everyone that the increase in income before tax also leads to an increase in tax.
