What the pros and cons of a proportionally higher allocation

Assignment Help Accounting Basics
Reference no: EM132431160

Question - In January 2018, the Paper Division of Dunder Mifflin Inc. purchased a piece of property in Scranton, Pennsylvania for $475,000. Other fees associated with the purchase, including closing costs and realtor commissions, totaled $25,000. The property contains land, a warehouse, and equipment. The Vice President of the Paper Division, Andy Bernard, and the Chief Financial Officer of Dunder Mifflin, Oscar Martinez, are discussing how the cost of the property should be allocated to the items purchased. The VP of the Paper Division, Andy Bernard, wants to allocate most of the cost to the land, while the CFO argues that they should allocate the bulk of the purchase cost to the equipment and warehouse because "no one wants property in Scranton." Assume that the same depreciation methods are used for financial reporting and tax purposes, and tax rates won't change over the next 5 years.

Andy Bernard is hoping to be promoted to the VP of the Printer Division, which is a much larger division than the Paper Division. A key determinant of whether Bernard will be promoted is the profitability of the Paper Division over the next two years.

1. What are the pros and cons of a proportionally higher allocation of the purchase cost to the land and a proportionally lower allocation to the land?

2. Why do you suppose Andy Bernard wants to allocate most of the cost to the land?

3. What is your recommendation for allocating the purchase costs to the assets?

4. Assume the equipment has a useful life of 5 years and the warehouse has a useful life of 10 years. The company plans to sell the equipment after it has been fully depreciated and the land and warehouse will be sold after the warehouse is fully depreciated. How will this allocation decision affect ending Retained Earnings at the end of the 10th year, after the assets have been sold?

Reference no: EM132431160

Reviews

Write a Review

 

Accounting Basics Questions & Answers

  Amanda has two dependent children ages 10 and 12 she earned

amanda has two dependent children ages 10 and 12. she earned 15000 in 2011 from her waitress job. how much of her child

  How computerized accounting systems impact internal control

Post on the Discussion Board a summary of the company and its objectives for the implementation. Do not just post a transcript of your interview, but synthesize the responses into a well written case study.

  Declared a 2 stock dividend on common stock and a 125

declared a 2 stock dividend on common stock and a 1.25 quarterly cash dividend per share on preferred stock. on the

  Calculate the NPV for the purchase

Calculate the NPV for the purchase, lease without the service contract, and lease with the service contract. Which is the best alternative

  Companies can present comprehensive income

1.Define comprehensive income. What are the two ways companies can present comprehensive income?

  The red and blue partnership has been created to operate a

the red and blue partnership has been created to operate a law firm. the partners have been attempting to devise a fair

  What is the annual interest rate

Biff deposited $9,000 in a bank account, and 10 years later he closes out the account, which is worth $18,000. What is the annual interest rate over the 10 year

  How would you account for the full-fare and the half-fare

Flying High Airlines Inc awards members of it "too high" program a second ticket at half price, How would you account for the full-fare and the half-fare

  How much was the direct labor cost on the job

Sargent Corporation applies overhead cost to jobs on the basis of 90% of direct labor cost. How much was the direct labor cost on the job

  How many units of regular sales could be lost

The above cost information is based on 11,400 units. A distributor has offered to buy 3,100 units at a price of $39 per unit.

  Compute the amount of the lease receivable

Wadkins Company, a machinery dealer, leased a machine to Romero Corporation on January 1, 2011. Compute the amount of the lease receivable

  Marple companys budgeted production in units and budgeted

marple companys budgeted production in units and budgeted raw materials purchases over the next three months are given

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd