Problem:
Jim Reed manages a fleet of utility trucks for a rural county government. He's been in his job 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 salvage 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.
Requirements:
Question 1. When a business sells a fully depreciated asset for its salvage value, is a gain or loss recognized?
Question 2. How do businesses determine what salvage values to use for their various assets? Are there "hard and fast" rules for salvage values?
Question 3. How would an organization prevent the kind of fraud depicted here?