Trashbin is a waste disposal company. Explain the effect the following actions of the management of Trashbin Company might have in managing earnings: 1 . Management assigned unsupported and inflated salvage values and extended the useful lives of

Question

company garbage trucks. 2 . Management assigned arbitrary salvage values to other assets that previously had not salvage value. 3 . Management did not record expenses required to write off the costs of unsuccessful and abandoned landfill development projects. 4 . Management recorded inflated environmental liabilities in connection with acquisitions of other companies. 5 . Management improperly capitalized a variety of expenses. 6 . Management did not establish sufficient liabilities for income taxes and other expenses.

Answer 1

1 . Unsupported and inflated salvage values for the garbage trucks (a major category of asset for a company in this line of business) would reduce the depreciable base and thus reduce periodic depreciation expense. The effect would be to increase net income or reduce net losses. Extending the useful lives of the trucks would result in a smaller depreciation charge against income each period.
2 . Newly-assigned, arbitrary salvage values would result in a smaller depreciable base and thus lower amounts of depreciation expense and would increase net income or decrease net losses.
3 . Failure to write-off unsuccessful landfill development projects would overstate both net income and assets.
4 . The acquisition of another company often entails assuming environmental liabilities associated with the operations of the acquired company. Overstating these liabilities allows management to subsequently record expenditures (perhaps even those having nothing to do with environmental liabilities) by reducing these liabilities rather than properly recording the expenditures as expenses.
5 . Improper capitalization of expenses defers these amounts on the balance sheet and allows them to be amortized against revenues over an extended period of time (or to not be expensed at all).
6 . Failure to record expenses incurred increases net income or decreases net losses and understates liabilities on the balance sheet.