Assume you work as an assistant accountant in the head office of a national movie rental
business, a la Blockbuster Inc. With the increasing popularity of online movie
rental operations, your company has struggled to meet its earnings targets for
the year. It is important for the company to meet its earnings targets this
year because the company is renegotiating a bank loan next month, and the terms
of that loan are likely to depend on the companys reported financial success. Also,
the company plans to issue more stock to the public in the upcoming year, to
obtain funds for establishing its own presence in the online movie rental
business. The chief financial officer ( CFO) has approached you with a solution
to the earnings dilemma. She proposes that the depreciation period for the
stock of reusable DVDs be extended from 3 months to 15 months. She explains
that by lengthening the depreciation period, a smaller amount of depreciation
expense will be recorded in the current year, resulting in a higher net income.
She claims that generally accepted accounting principles require estimates like
this, so it would not involve doing anything wrong.

Required:
Discuss the CFOs proposed solution. In your discussion, consider the following questions.
Will the change in depreciation affect net income in the current year in the
way that the CFO described? How will it affect net income in the following
year? Is the CFO correct when she claims that the change in estimated
depreciation is allowed by GAAP? Who relies on the video companys financial
statements when making decisions? Why might their decisions be affected by the
CFOs proposed solution? Is it possible that their decisions would not be
affected? What should you do?