- 15 Marks
CR – May 2024 – L3 – SC – Q7 – Presentation of Financial Statements (IAS 1)
Discuss allocation impacts of purchase price for land and warehouse on earnings and identify ethical issues in CFO’s approach.
Question
Signal PLC purchased land and warehouse for N90,000,000. The warehouse is expected to last for 20 years and to have a salvage value equal to 10% of its cost. The Chief Finance Officer (CFO) and the Chief Accountant (CA) discussed the allocation of the purchase price between the land and the warehouse. The CFO believes that the largest amount possible should be assigned to the land because that will improve reported net income in the future. Depreciation expense will be lower because land is not depreciated. He suggested allocation of one third of the cost to the land. The CA argues that the smallest amount possible, about one-fifth of the purchase price, should be allocated to the land, thereby saving income taxes, since the depreciation will be greater if lesser amount is allocated to land.
Required:
(a) Evaluate how the different allocations of one-third and one-fifth to land will affect reported earnings and determine how the purchase cost should be allocated. (8 Marks)
(b) Identify and discuss inherent ethical issues in the CFO’s submission in the above scenario. (7 Marks)
Total Marks: 15
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