Jim Reed manages a fleet of utility trucks for a rural county government. He\'s

Question

Jim Reed manages a fleet of utility trucks for a rural county government. He's been in his job for 30 years, and he knows where the angles are. He makes sure that when new trucks are purchased, the salvage value is set as low as possible. Then, when they become fully depreciated, they are sold off by the county at residual value. Jim makes sure his buddies in the construction business are first in line for the bargain sales, and they make sure he gets a little something back. Recently, a new county commissioner was elected with vows to cut expenses for the taxpayers. Unlike other commissioners, this man has a business degree, and he is coming to visit Jim tomorrow.

1. Why is Jim Reed doing this?

2. When a business sells a fully depreciated asset for its residual value, is a gain or loss recognized?

3. How do businesses determine what residual values to use for their various assets?

4. How would an organization prevent the kind of fraud depicted here?

Please answer the questions 1-4 professionally thoroughly and completely.

Explanation / Answer

1. Jim Reed is setting the salvage value as low as possible, so the residual value of the trucks are shown as almost neglegible and company sell the assets at low disposable price which Jim's buddies buy to benefit him for all these activities.

2.When a business sells a fully depreciated asset for its residual value, it is treated/recognized as a gain.

3. If it is too difficult to determine a residual/salvage value, or if the residual/salvage value is expected to be minimal, then it is not necessary to include a residual/salvage value in depreciation calculations. Instead, simply depreciate the entire cost of the fixed asset over its useful life. Any proceeds from the eventual disposition of the asset would then be recorded as a gain.

4. As there is no hard and fast rule to have the residual/salvage value, so an organization could not prevent frauds of this kind to happen directly. The best solution for its prevention is that company must set a audit/anti-fraud panel of employees/engineers, who technically access and set the residual value and not employee has a monopolistic on all these exercises.

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