American Movieplex, a large movie theater chain, leases most of its theater facilities

Ethics Case 15-4 Leasehold improvements

American Movieplex, a large movie theater chain, leases most of its theater facilities. In conjunction with recent operating leases, the company spent $28 million for seats and carpeting. The question being discussed over breakfast on Wednesday morning was the length of the depreciation period for these leasehold improvements. The company controller, Sarah Keene, was surprised by the suggestion of Larry Person, her new assistant.

Keene: Why 25 years? We've never depreciated leasehold improvements for such a long period.
Person: I noticed that in my review of back records. But during our expansion to the Midwest, we don't need expenses to be any higher than necessary.
Keene: But isn't that a pretty rosy estimate of these assets' actual life? Trade publications show an average depreciation period of 12 years.

Required:
1. How would increasing the depreciation period affect American Movieplex's income?
2. Does revising the estimate pose an ethical dilemma?
3. Who would be affected if Person's suggestion is followed?

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Morgan Company is considering a capital investment of $180,000 in additional productive facilities

E12-8 Morgan Company is considering a capital investment of $180,000 in additional productive facilities. The new machinery is expected to have a useful life of 6 years with no salvage value. Depreciation is by the straight-line method. During the life of the investment, annual net income and net annual cash flows are expected to be $20,000 and $50,000 respectively. Morgan has a 15% cost of capital rate which is the required rate of return on the investment.

Instructions
(a) Compute (1) the cash payback period and (2) the annual rate of return on the proposed capital expenditure.
(b) Using the discounted cash flow technique, compute the net present value.


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Riviera Theater Inc. was recently formed. All facilities were completed on March 31

P3-8B Riviera Theater Inc. was recently formed. All facilities were completed on March 31. On April 1, the ledger showed: Cash $6,300; Land $10,000; Buildings (concession stand, projection room, ticket booth, and screen) $8,000; Equipment $6,000; Accounts Payable $2,300; Mortgage Payable $8,000; and Common Stock $20,000. During April, the following events and transactions occurred.

Apr. 2 Paid film rental fee of $800 on first movie.
3 Ordered two additional films at $750 each.
9 Received $4,700 cash from admissions.
10 Paid $2,000 of mortgage payable and $1,200 of accounts payable.
11 Hired M. Gavin to operate the concession stand. Gavin agrees to pay Riviera Theater 17% of gross receipts, payable monthly.
12 Paid advertising expenses $410.
20 Received one of the films ordered on April 3 and was billed $750. The film will be shown in April.
25 Received $3,000 cash from customers for admissions.
29 Paid salaries $1,900.
30 Received statement from M. Gavin showing gross receipts of $2,000 and the balance due to Riviera Theater of $340 for April. Gavin paid half of the balance due and will remit the remainder on May 5.
30 Prepaid $1,200 rental fee on special film to be run in May.

In addition to the accounts identified above, the chart of accounts shows: Accounts Receivable, Prepaid Rent, Service Revenue, Sales Revenue, Advertising Expense, Rent Expense, Salaries and Wages Expense.

Instructions
(a) Enter the beginning balances in the ledger T accounts as of April 1.
(b) Journalize the April transactions, including explanations. (Note: Riviera records admission revenue as service revenue, concession revenue as sales revenue, and film rental expense as rent expense.)
(c) Post the April journal entries to the ledger T accounts.
(d) Prepare a trial balance on April 30, 2012.

Click here for the solution: Riviera Theater Inc. was recently formed. All facilities were completed on March 31