Denver Company recently hired Terry Davis as an accountant. He was given respons

Question

Denver Company recently hired Terry Davis as an accountant. He was given responsibility for all accounting functions related to fixed asset accounting. Tammy Sharp, Terry's boss, asked him to review all transactions involving the current year's acquisition of fixed assets and to take necessary action to ensure that acquired assets were recorded at proper values. Terry is satisfied that all transactions are proper except for an April 15 purchase of an office building and the land on which it is situated. The purchase price of the acquisition was $200,000. However, Denver Company has not reported the land and building separately.

Terry hired an appraiser to determine the market values of the land and the building. The appraiser reported that his best estimates of the values were $150,000 for the building and $70,000 for the land. When Terry proposed that these values be used to determine the acquisition cost of the assets, Tammy disagreed. She told Terry to request another appraisal of the property and asked him to stress to the appraiser that the land component of the acquisition could not be depreciated for tax purposes. The second appraiser estimated that the values were $180,000 for the building and $40,000 for the land. Terry and Tammy agreed that the second appraisal should be used to determine the acquisition cost of the assets.

Required
Did Terry and Tammy act ethically in this situation? Explain your answer.

Explanation / Answer

Terry and Tammy acted ethically in this situation. Because the value of asset amount increased then automatically the depreciation amount also high. When we are comparing the first appraiser values with the second appraiser values the building value increased by $30,000 . Hence, the depreciation value is high .The impact of income taxes on capital investment decisions can be material. For example, in determining depreciation for federal income tax purposes, useful lives that are much shorter than the actual useful lives are often used. Also, depreciation for tax purposes often differs from depreciation for financial statement purposes. As a result, the timing of the cash flows for income taxes can have a significant impact on capital investment analysis.                                                                                                           

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