Part A -
Grandma's Cookie Company purchased a factory building. The company controller, Don Nelson, is in the process of allocating the lump-sum purchase price between land and building. Don suggests to the company's chief financial officer, Judith Prince, that they fudge a little by allocating a disproportionately higher share of the price to land. Don reasons that this will reduce depreciation expense, boost income, increase their profit-sharing bonus, and hopefully, increase the price of the company's stock. Judith has some reservations about this because the higher reported income will also cause income taxes to be higher than they would be if a correct allocation of the purchase price is made.
What are the ethical issues? What stakeholders' interests are in conflict?
Part B -
1. Please read the Ethical Dilemma. This dilemma is designed to raise your awareness of accounting issues with ethical ramifications. Use the analytical slops outlined below to evaluate this situation.
Analytical Model for Ethical Decisions
Step 1. Determine the facts of the situation. This involves determining the who, what, where, when, and how.
Step 2. Identify the ethical issue and the stakeholders. Stakeholders may include shareholders, creators, management, employees, and the community.
Step. 3 Identify the values related to the situation. For example, in some situations confidentiality may be an important value that may conflict with the right to know.
Step 4. Specify the alternative courses of action.
Step 5. Evaluate the courses of action specified in step 4 in terms ol their consistency with the values identified in step 3. This step may or may not lead to a suggested course of act on.
Step 6. Identify the consequences of each possible course of action. If step 5 does not provide a course of action, assess the consequences of each possible course of action for all of the stakeholders involved.
Step 7. Make your decision and take any indicated action.
2. At the beginning of the year. Patrick Company acquired a computer to be used in its operations. The computer was delivered by the supplier, installed by Patrick, and placed into operation. The estimated useful life of the computer is five years, and its estimated residual value is significant.
Required:
1. What costs should Patrick capitalize for the computer?
2. What is the objective of depreciation accounting?
3. What is the rationale for using accelerated depreciation methods?