lated deplav analyst nting Ethics Case Linda Tristan, assistant controller for A
ID: 2512101 • Letter: L
Question
lated deplav analyst nting Ethics Case Linda Tristan, assistant controller for Ag-Growth, Inc., a biotechnolog concerns about the accounting analysis for the firm's purchase of a land site and building K-7. Accounting Ethi has firm, from Hylite Co dum Land for used laboratory facility, i te Corporation. The price for this package purchase was $1,800,000 cash. A memoran m the controller, Greg Fis ter, stated that the journal entry for this purchase should debit r $1,350,000, debit Building for $450,000, and credit Cash for $1,800,000. The building, a The source documents supporting the transaction include two appraisals of the property, one done for Ag-Growth and one done for Hylite Corporation. The appraisal for Ag-Growth valued the land at $1,000,000 and the building at $500,000. The appraisal for Hylite Corporation (done by a different appraiser) valued the land at $1,500,000 and the building at $750,000. Negotiations between the two firms finally settled on an overall price of $1,800,000 for the land and the building Tristan asked Fister how he arrived at the amounts to be recorded for the land and building since each appraisal valued the land at only twice the building's value. "Well," replied Fister, "I used the $1,500,000 land value from Hylite's appraiser and the $500,000 building value from our appraiser That relationship shows the land to be worth three times the building's value. Using that relation- ship. lassigned 75 percent of our actual purchase price of $1.800,000to the land and 25 percent of the purchase price to the building. But why do it that way?" asked Tristan.Explanation / Answer
a. First, we need to remember that while land is not a depreciable asset, building is a depreciable asset, and the building has zero salvage value.
Both the appraisers had allocated 2/3 of the cost to the land, and 1/3 of the cost to the building. Accordingly, of the total amount of $ 1,800,000 paid to acquire the property, $ 600,000 should have been allocated to the building.
According to Fister the controller, $ 450,000 should be allocated to the building, and not $ 600,000.
This would reduce the initial carrying value of the building to $ 450,000. Therefore the depreciation expense over the life of the building would be reduced by $ ( 600,000 - 450,000) = $ 150,000. By reducing depreciation expense, profit would be improved by $ 150,000 over the next decade.
b. No, it is not.
c. Fister's analysis is not acceptable as he has arbitrarily used separate numbers from two different valuers to come up with a ratio which would suit his purpose of reporting higher profits over the next decade. If Fister's ideas are followed, land would be overstated while the building would be understated, and the information as to the financial position of the company would be distorted. The financial statements would report incorrect values to their users.
d. Tristan can raise the issue with the board of directors with the two valuation reports as the supporting evidence, or she can refer the matter to the ethics committee if any of the company. Else she should look for another job. Or she may also consider filing a suit against Fister and the company for poor workplace ethics.
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