Overview
1. Intermediate Accounting II
(450 words for the DB post) (APA citations) (in-text Citations are a must)
(no Plagiarism) (No artificial intelligence)
Module 7: Discussion Forum
- Module 7 Overview (1 of 6)
- 7.1 Changes in Accounting Principles (2 of 6)
- 7.2 Changes in Accounting Estimates (3 of 6)
- 7.3 Corrections of Errors (4 of 6)
- 7.4 IFRS and US GAAP Accounting Changes and Errors (5 of 6)
- Current Discussion: Module 7: Discussion Forum (6 of 6)
Airline X depreciates its airplanes over a 15-year period and estimates a salvage value of 10% of the cost of the plane. At the same time, Airline Y depreciates identical airplanes over a 25-year period and estimates a salvage value of 15% of the cost of the plane. As expected, these different assumptions resulted in different operating results. For example, if an airplane costs $ 10 million, Airline X will depreciate $260,000 more per year for 15 years than Airline Y.
Choose ONE of the following questions to discuss:
- Which company’s estimate of useful life more closely reflects reality?
- Will you feel comfortable as a passenger in a 25-year-old airplane?
- Does the fact that Airline Y subsequently went out of business provide any information as to why its estimates were so substantially different from those of financially sound Airline X?
2. Intermediate Accounting II
(300 words for the DB reply) (APA citations) (in-text Citations are a must)
(no Plagiarism) (No artificial intelligence)
Cindy Ambrosio Chavez
Oct 21 3:29pm
Reply from Cindy Ambrosio Chavez
Using the CSU Global Library, identify another company that reported accounting errors or changes. How did investors' and the public's reactions to the report affect the company?
Hello,
One high-profile example of accounting errors impacting investor confidence is Kraft Heinz. In 2019, the company disclosed that it had misstated financial results going back to 2016, primarily due to the incorrect timing of cost and rebate recognition in supplier contracts (Haddon, 2019). These errors understated the cost of goods sold by $208 million and required Kraft Heinz to restate multiple years of financial statements. As we read in chapter 20 such errors must be corrected retrospectively, with prior statements revised and disclosure notes explaining the nature and impact of the corrections. The company also revealed misconduct within its procurement division, resulting in employee terminations and a broader internal investigation. Although senior management was cleared of wrongdoing, the company acknowledged material weaknesses in internal controls and committed to strengthening its financial reporting procedures.
The public and investor reaction was swift. Kraft Heinz’s stock dropped to its lowest level since the 2015 merger, and the company faced a federal securities probe and shareholder lawsuits (Kraft Heinz restates results after errors, 2019). Analysts and media outlets questioned the company’s governance and transparency, especially given the $15.4 billion brand write-down announced earlier that year. While shares briefly rebounded after the company filed its overdue financials, the reputational damage lingered. This case illustrates how even non-fraudulent accounting errors , if left uncorrected or poorly disclosed , can erode investor trust and trigger regulatory scrutiny. It also reinforces the importance of timely, accurate financial reporting and strong internal controls in maintaining credibility with stakeholders (Kraft accounts mistake, 2019).
Haddon, H. (2019). Kraft Heinz Concludes Internal Investigation Into Accounting Errors; Food conglomerate had delayed financial disclosures after writing down the value of some brands. Dow Jones & Company Inc..
Kraft accounts mistake. (2019). Daily Mail, 76.
Kraft Heinz restates results after errors. (2019, May 8). Australian [National, Australia], 25. https://link-gale-com.csuglobal.idm.oclc.org/apps/doc/A584636096/AONE?u=colstglobal&sid=bookmark-AONE&xid=9079f375Links to an external site.
3. Intermediate Accounting II
(300 words for the DB reply) (APA citations) (in-text Citations are a must)
(no Plagiarism) (No artificial intelligence)
Alisa Wilhite
Oct 21 6:52pm| Last reply Oct 22 7:28am
Reply from Alisa Wilhite
Hi Class,
Will you feel comfortable as a passenger in a 25-year-old airplane? If yes, why and if not, why not?
I would feel comfortable, by and large, as a passenger in a 25-year-old airplane – provided the airline has a stringent maintenance, overhaul program and safety inspection practices. The age, by itself, may not matter, although older aircraft have a higher likelihood of becoming involved in an incident (Spiceland et al., 2023).
The article “Does aircraft age matter?” published by Business Traveller, for instance, points to better comfort, newer and bigger seats, higher cabin pressure and air filtration, and more entertaining in-flight features in newer jets. The article, however, is also quick to point out that maintenance, repair and overhaul (MRO) costs only increase with age. “Older planes require more frequent and intensive inspections, part replacements and overhauls.” This important insight suggests that a 25-year-old looking airplane could, in economic and operational terms, play a very different profile from a relatively new jet.
From an accounting standpoint—and in line with the reasoning taught by Spiceland et al. (2023) the estimate of useful life and salvage value when depreciating an asset such as an airplane must take into account the pattern in which the asset’s economic benefits are used up (consumed). If a useful life of 25 years is used while actual physical and operational data (maintenance checks, flight cycle times) suggest a much shorter life (say 15 years), then early-years depreciation will be understated, profits overstated, and the carrying value may not reflect remaining economic benefits. Shorter useful lives result in depreciation expense that is more aligned with the economic reality. (Spiceland et al., 2023)
In the current context, if the airline sticks to a 25-year useful life estimate, but the airline-type in question actually goes through heavier use (many cycles, older parts, higher MRO), then the carrying value of the asset may be too high. It overstates the asset’s remaining economic benefits. The Business Traveller article, in fact, is instructive in this sense. It notes that a 10-year-old plane could cost twice as much to maintain and repair as a new one and that older models “require more frequent and intensive inspections.”
To conclude:
-Alisa