(Cost of Land vs. Building—Ethics)
Tones Company purchased a warehouse in a downtown district where land values are rapidly increasing. Gerald Carter, controller, and Wilma Ankara, financial vice president, are trying to allocate the cost of the purchase between the land and the building. Noting that depreciation can be taken only on the building, Carter favors placing a very high proportion of the cost on the warehouse itself, thus reducing taxable income and income taxes. Ankara, his supervisor, argues that the allocation should recognize the increasing value of the land, regardless of the depreciation potential of the warehouse. Besides, she says, net income is negatively impacted by additional depreciation and will cause the company's stock price to go down.
Instructions
Answer the following questions.
(a)
What stakeholder interests are in conflict?
(b)
What ethical issues does Carter face?
(c)
How should these costs be allocated?
(a) The stakeholders interest that would be under conflict would be land valuations, profits as well as periodic financial records. The stakeholders making investments in land as the land values are increasing rapidly whereas the vice president and controller are trying to allocate cost of purchase between building and land and depreciation could be taken on only the building and the controllers is also trying to place a high proportion of cost on warehouse which would reduce the taxable income and income taxes which is unethical.In case a audit is conducted the auditor would object this income and also the net income would be negatively impacted by additional depreciation.
(b) As Carter is putting on the warehouse a high proportion of cost ,it is considered as unethical as this would lead to a very high amount of depreciation being shown in the financial statements, which would show a lower amount of net income.
(c) The cost allocation method used should involve that the building and land values must be shown separately.The cost of land usually involves the purchase price, cost incurred for improving the condition for its intended purpose or use, closing costs as well as any other additional land improvements. Cost of building involves all the expenditures related to their construction or acquisition.
(Cost of Land vs. Building—Ethics) Tones Company purchased a warehouse in a downtown district where land...
Bedrock Corporation purchased an office building in an up-and-coming location where land values are quickly appreciating. Jimmy Ford, controller, and Barbara Patel, financial vice president, are trying to allocate the cost of the purchase between the land account and the building account. Noting that depreciation can be taken only on the building, Ford favors placing a very high proportion of the cost on the building itself, thus reducing taxable income and income taxes. Patel, his supervisor, argues that the allocation...
In January 2018, Dunder Mifflin Inc. bought property in downtown Scranton. The property contains land, a warehouse, and some limited equipment. Property values in the area have been increasing rapidly over the past decade. The price paid for the property needs to be allocated to the items purchased and the controller and financial vice president are having that discussion. Dunder Mifflin's controller wants to allocate the largest proportion of the cost to the warehouse and equipment while the financial VP,...