THIS IS THE STORY:
Delores Smith owns a small business and manages the accounting. Her company purchases some new equipment by obtaining a loan at the bank. She is required to submit financial statements to the bank so they can monitor the financial well-being of the company to determine if the interest rate on the loan will be increased. Smith believes her company’s profits will decline this year which will increase the interest rate on the loan for the equipment. The current depreciation rule being used for asset additions assumes assets are in use on the first day of the month nearest the purchase date. Smith decides to change the depreciation rule so that all asset additions are considered to be in use on the first day of the following month.
THESE ARE THE QUESTION NEEDED TO BE ANSWERED:
Be sure to include the following in your original response which should be at least four paragraphs with at least five sentences each:
- A brief description of the scenario in your own words.
- What are the factors managers must apply when choosing a depreciation method.
- Is Smith’s new rule an ethical violation or a legitimate decision in computing and recording depreciation?
- How will this new rule impact the company’s income statement?
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