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.
2. Is Choi’s rule an ethical violation, or is it a legitimate decision in computing depreciation?
3. How will Choi’s new depreciation rule affect the profit margin of her business?

Damaris Garcia Bonilla

After reading about Choi’s scenario, she is acting unethical. The bank has asked her to submit the semiannual financial statement to monitor her financial health of the business, but she knows that is will decline and she decided to apply a new rule so that her company doesn’t get jeopordize. By applying this new rule, she will increase net income that will result in an overly favorable profit margin.

Madelin Garcia

Flo Choi

COLLAPSE

1. First off, the three factors that managers like choi need to take into consideration about depreciation are the cost of the equipment, the life of the machines, and the salvage value of the machine. The decisions managers like choi need to make now are to see after the depreciation costs, life of the equipment and the life of machines will be worth it, if they are still profitable or losing them money. This change will only improve the profits slightly but for the next months to come.
2. Second, At the point when assets are put being used on a day other than the first day of the month a supposition that is frequently made that the assets are put being used on the first day of the month closest to the date of the buy or purchase. Choi is doing everything the can to save on depreciation costs. Although it may be an ethical violation on the ground of consistency principle which suggests the same accounting practices should be followed over the year, , they have not technically done anything wrong legally.
3. There would not be major effect new depreciation rule because it would be applicable to the asset which are new purchased and previously purchased assets would be depreciated based on previous rule. Depreciation is based on the number of days the assets have been put to use, and the method followed will reduce the number of days the asset will be put to use. So, the depreciation would be lower, and this would have a positive impact on the profit margin of the company. The actual day of the month also affects the depreciation cost, hence why choi is leaning to use the assets only towards certain times of the month on specific dates, leading to even more profit margin on the company.