Flo Choi owns a small business and manages its accounting. Her company just fini
ID: 2475849 • Letter: F
Question
Flo Choi owns a small business and manages its 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 from 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 depre-ciation 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.)
Required
Identify decisions that managers like Choi must make in applying depreciation methods. Is Choi’s rule an ethical violation, or is it a legitimate decision in computing depreciation? How will Choi’s new depreciation rule affect the profit margin of her business?
Explanation / Answer
Managers will like Choi to depreciate asset on straight line basis , from the date of purchase,
Yes there is an ethical violation since Choi decided to change depreciation method inorder to improve her financial strength
Choi's new depreciation will at the most will be effected by one months depreciation , since if the purchase date in the first half of the month then depreciation is charged from the first of that month however according to new rule it will be charged from the next month . also if the asset is purchased in second half of month then depreciation charged will be same under both methods.
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