Page 503 - Accounting Principles (A Business Perspective)

This book is licensed under a Creative Commons Attribution 3.0 License

There are two alternative methods of disposing of the materials. The first alternative is to bury the
waste in steel drums on a tract of land adjacent to the factory building. There is currently no legal
prohibition against doing this. The cost of disposing of the materials in this way is estimated to be
USD 50,000 per year. The best estimate is that the steel drums would not leak for at least 50 years,
but probably would begin leaking after that time. The second alternative is to seal the materials in

lead drums that would be disposed of at sea by a waste management company. The cost of this
alternative is estimated to be USD 400,000 per year. The federal government has certified this
method as the preferred method of disposal. The best estimate is that the lead drums would never
rupture or leak.
Belex Corporation has seen some tough economic times. The company suffered losses until last
year, when it showed a profit of USD 750,000 as a result of a new manufacturing project. So far, the
waste materials from that project have been accumulating in two large vats on the company's land.

However, these vats are almost full, so soon management must decide how to dispose of the
materials.
One group of managers is arguing in favor of the first alternative because it is legally permissible
and results in annual profits of about USD 700,000. They point out that using the second
alternative would reduce profits to about USD 350,000 per year and cut managers' bonuses in half.
They also claim that some of their competitors are now using the first alternative, and to use the
second alternative would place the company at a serious competitive disadvantage.
Another group of managers argues that the second alternative is the only safe alternative to pursue.
They claim that when the steel drums start leaking they will contaminate the ground water and

could cause serious health problems. When this contamination occurs, the company will lose public
support and may even have to pay for the cleanup. The cost of that cleanup could run into the
millions.

Understanding the learning objectives
• Advantages:
(a) Easy transfer of ownership.
(b)Limited liability.

(c) Continuous existence of the entity.
(d)Easy capital generation.
(e) Professional management.
(f) Separation of owners and entity.
• Disadvantages:
(a) Double taxation.
(b)Government regulation.

(c) Entrenched, inefficient management.
(d)Limited ability to raise creditor capital.

Accounting Principles: A Business Perspective 504 A Global Text