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 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.
Please answer the following questions:
What stakeholder interests are in conflict?
What ethical issues does Ford face?
How should these costs be allocated?
a) The employee’s interest and shareholders’ interest are in conflict in the given situation
b) The employees want the depreciation to be charged higher which will reduce the net income to be reported and consequently the taxes to be paid on net income will be lower. But the lower profit reported will reduce the earning per share and will have an impact on the market share price. Also the return on shareholders’ equity and other ratios like return on assets, operating margin and net profit margin will reduce due to the reduced profitablity. There is compromise of integrity in working by Controller and Financial Vice president
c) The cost should be allocated based on appraisal value given by an independent appraiser. The appraisal report would carry the current market values of the land and building in similar locations and would place a similar value on this office building. Based on appraisal report the costs should be allocated between land and buildings.
Bedrock Corporation purchased an office building in an up-and-coming location where land values are quickly appreciating....
(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...