Flo Choi owns a small trade and manages its accounting. Her company just completed a year in which a large amount of borrowed funds was invested in a new building addition as well as in fixture and equipment additions. Choi's banker needs 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 lift the interest rate on the borrowed funds to reflect the increased loan risk from bank's point of view. Choi knows profit margin is likely to decline in this year. As she prepares year-end adjusting entries, she decides to apply the subsequent depreciation rule: All asset additions are considered to be in use on the first day of the subsequent month. (The last rule assumed assets are in use on the first day of the month nearest to the purchase date.)
Required
1. Find decisions that managers like Choi must make in applying depreciation methods.
2. Is Choi's rule an ethical violation, or is it a legitimate decision in computing depreciation?
3. How can Choi's new depreciation rule change profit margin of her business?