Flo Choi owns a small business and manages the accounting. Her company just fini
ID: 2369249 • Letter: F
Question
Flo Choi owns a small business and manages the accounting. Her company just finished a year in which a large amount of borrowed funds was invested in a new building addition as well as in equipment and fixture additions. Choi's banker requires her to submit semiannual financial statements so he can monitor the financial health of her business. He has warned her that if profit margins erode, he might raise the interest rate on the borrowed funds to reflect the increased loan risk form the bank's point of view. Choi knows profit margin is likely to decline this year. As she prepares year-end adjusting entries, she decides to apply the following depreciation rule: All asset additions are considered to be in use on the first day of the following month. (The previous rule assumed assets are in use on the first day of the month nearest to the purchase date.)
a. Identify decisions that managers like Choi must make in applying depreciation methods.
b. Is Choi's rule an ethical violation, or is it a legitimate decision in computing depreciation?
c. How will Choi's depreciation rule affect the profit margin of her business?
Explanation / Answer
1) Manager likes Choi to submit her financial statments so that he can assess her profit margin , so he would like to depreciate the assests accordingly as would present the true picture.
2) It is unethical if she does it to increase profit margin . these methods are commonly used by companies
3)Chois new depreciation method have negligible effect on the profit margin for if the asset is purchased close to the end month then anyway if will be depreciated in the folloeing month , the only difference being if the asset is purchased in the beginning then one month less depreciation will be applied.
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