ACG 3113 University of South Florida Accounting Discussion

Description

Writing Assignment  

Imagine that you work in the accounting department at the firm “No More

Accounting Fraud Inc.” and your CEO has just purchased a building and some land

in a basket purchase for $5,000,000.  The firm has two appraisals performed, with

the first appraisal estimating that the land should have 20% of the purchase price

allocated to it, while the second appraisal suggests that 40% of the purchase price

should be allocated to it.  It is further estimated that the building has a 20-year

useful life with a $50,000 salvage value. The CEO’s compensation (more

specifically his bonus) is based on firm performance, as measured by return on

assets (calculated as net income divided by total assets) and net income. The board

of directors is concerned that the CEO may be opportunistically selecting an

appraisal and a depreciation method that will increase his compensation in the near

term.  

 
You have been asked to prepare a brief (maximum of 1.5 pages, double spaced at

12–point font) memo that answers the following questions that the Board of

Directors (and more specifically the audit committee) has raised:

 
1. If the firm choses to use the first appraisal how would that effect return on

assets during the first three years of the buildings life relative to if it instead

uses the second appraisal (you don’t need to provide specific numbers, just a

conceptual comparison)?     

2. If the firm choses to use straight-line depreciation how would that effect

return on assets during the first three years of the buildings life relative to if

it instead uses double declining balance (you don’t need to provide specific

numbers, just want a conceptual comparison)?     

3. If the firm choses to use straight-line depreciation how would that effect net

income in year 4 if the building is sold at the beginning of the 4th year

relative to if it instead uses double declining balance (you don’t need to

provide specific numbers, just want a conceptual comparison)?     

4. If the firm choses to use straight-line depreciation how would that effect net

income in year 21 if the building is sold at the beginning of the 21st year

relative to if it instead uses double declining balance (you don’t need to

provide specific numbers, just want a conceptual comparison)?     

Explanation & Answer:
1 Page

Tags:
accounting

ceo

building

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