The Tenth National Bank had taken possession of a shopping mall in foreclosure o

Question

The Tenth National Bank had taken possession of a shopping mall in foreclosure of a mortgage, When the mall was inspected prior to being sold by the bank to the real estate company, it discovered that it had an extensive asbestos problems. An estimate indicated that it would cost $1 million to remove the asbestos. The bank had also purchased an office building for its headquarters . The building was inspected before the purchase and similar asbestos problem was discovered. An estimate indicated that would cost $2 million to remove the asbestos, and the bank completed the purchase. The bank's president has asked you how to account for these transactions. Research the related generally accepted accounting principles and prepare a short memo to the president that answers her question. Does this situation create a ethical issue?

Explanation / Answer

The asbestos problem was clearly overseen by the inspection committee. They should have notified the bank about the hazard of asbestos so that the bank could take corrective action then. Now since the bank has already purchased the building. the removal of asbestos can be accounted for as improvement costs of the building and the same can be shown as expense deductible when the building are sold and the calculation of capital gain on the buildings are evaluated.

Yes, there is definitely an ethical issue here. The bank can keep the asbestos as in in order to save the costs of about 3 million and then that would become profitable to the bank. However, on the larger picture, this would create a health hazard for its employees in the bank building. Hence, in order to take a moral high ground, the bank should remove the asbestos and take accounting actions as specified earlier.

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