Week5 Acc245

CheckPoint: Ethics and Computing Depreciation

BTN 10-3 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 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.)

Required

1. Identify decisions that managers like Choi must make in applying depreciation methods.

Here Flo will be using the double-declining-balance (DDB) method to double the straight-line rate. This method is applied in three steps: first step is computing the asset’s straight-line depreciation rate, doubling that rate, and the last step is to compute the depreciations expense. This part is done by multiplying the last expense rate by the assets from the beginning of the book value period.

2. Is Choi’s rule an ethical violation, or is it a legitimate decision in computing depreciation?

No, Choi’s rule would not be an ethical violation as long as the equipment is used. If this method is used only to save money and look more beneficial for the period then her decision would not be legitimate or ethical. With this decision there is still the chance of the interest rate being raised therefore it is still a risk.

3. Choi’s depreciation rule affects the profit margin of her business with the increase in the output. The business’s...