Question

Please read CA10-6 Ethics (Cost of Land vs Building). Answer questions a), b) & c). After your initial post, please comment or respond to at least two of your classmates.

CA10-6.    

(Cost of Land vs. Building—Ethics)

Tones Company purchased a warehouse in a downtown district where land values are rapidly increasing. Gerald Carter, controller, and Wilma Ankara, financial vice president, are trying to allocate the cost of the purchase between the land and the building. Noting that depreciation can be taken only on the building, Carter favors placing a very high proportion of the cost on the warehouse itself, thus reducing taxable income and income taxes. Ankara, his supervisor, argues that the allocation should recognize the increasing value of the land, regardless of the depreciation potential of the warehouse. Besides, she says, net income is negatively impacted by additional depreciation and will cause the company's stock price to go down.

Instructions

Answer the following questions.

(a)  

What stakeholder interests are in conflict?

(b)  

What ethical issues does Carter face?

(c)  

How should these costs be allocated?

Answer 1

1. Going into the question clearly, there might be an impact in two ways on stakeholders in both the alternative situations. If the warehouse is valued more and depreciation will be more as a result. The tax authorities cannot accept this and it is an evasion of tax on the other hand as the net income will be reduced as a result of more depreciation and tbe stock prices are effected, this will have an impact on the shareholders of the company. The company should take into consideration both these issues into consideration keeping aside what is ethical and what is unethical.
2. Coming to the second point the ethical issues. If we think in an ethical point of view the company should genuinely value the warehouse and land as per the current market values on the date of transfer and allocate the costs. Which will definitely leave a high value on land and low value on building.
3. To me, the ethical way of consideration matters and the costs should be allocated as per the manner stated in point 2 above.