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Chapter 10 Discussion Flo Choi owns a small business and manages its accounting
Chapter 10 Discussion
Flo Choi owns a small business and manages its accounting. Her company just finished a year in which a large amount of borrowed funds was invested in a new building addition as well as in equipment and fixture additions. Choi's banker requires her to submit semiannual financial statements so he can monitor the financial health of her business. He has warned her that if profit margins erode, he might raise the interest rate on the borrowed funds to reflect the increased loan risk from the bank's point of view. Choi knows profit margin is likely to decline this year. As she prepares year-end adjusting entries, she decides to apply the following depreciation rule: All asset additions are considered to be in use on the first day of the following month. (The previous rule assumed assets are in use on the first day of the month nearest to the purchase date.)
Required
Is Choi's rule an ethical violation, or is it a legitimate decision in computing depreciation? Discuss
Expert Solution
Choi's rules is definitely an ethical violation. As a business owner and manager, she is in a position to predict whether her revenues and expenses will change and whether her profit margins will therefore decline in the year ahead. Her application of this depreciation rule is unethical because it is inconsistent with the previous assumptions regarding asset depreciation and because it is used with the intention to deceive the bank so that her interest rates for borrowed funds do not rise. Deception is not a valid justification for this change in handling of assets and their depreciation. I do hope she will reconsider despite the rise in interest rates that might result if her profit margin predictions come true. Honest and trustworthiness should be of the utmost importance to Ms. Choi in all her dealings with both creditors and customers.
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