Question 1: What Would Your Accountant Say? The president of your company just had the market value of the corporate headquarters appraised at $10M; however, the value of the property in the firm’s financial statements is $5M, consisting of the historical cost at the time of purchase of $7M, less accumulated depreciation on the building of $2M. She wants to know why accounting principles do not allow the headquarters to be presented at market value in the financial statements. What would your accountant say?
Question 1: What Would Your Accountant Say?
The president of your company just had the market value of the corporate headquarters appraised at $10M; however, the value of the property in the firm’s financial statements is $5M, consisting of the historical cost at the time of purchase of $7M, less
Question 2: What Would Your Finance Manager Say?
Several executives of your firm have gathered to discuss whether to invest in a new production facility. There are several alternatives from which to choose, including constructing a new plant or purchasing an existing building. Since none of the executives present at the meeting have a background in finance, they ask you to describe the pros and cons of a few capital budgeting methods used to evaluate investment decisions. What would your finance manager say?
Question 3: Theory Vs. Practice
As explained in this chapter, accounting theory allows firms to choose a depreciation method from several equally acceptable alternatives to allocate the cost of a long-term asset to expense over the useful life of the asset. In practice, however, most organizations use the straight-line method of depreciation for financial statement presentation and the Modified Accelerated Cost Recovery System (MACRS) for tax reporting purposes because the Internal Revenue Code allows firms to use an accelerated depreciation method on their tax returns, instead of the straight-line method they report under GAAP.
Discuss why a company would choose to use straight-line deprecation for financial reporting purposes and an accelerated method for tax purposes. Speculate on why the tax code might allow firms to accelerate depreciation for investments in productive resources.
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