Reference no: EM132749534
Question: Answer the questions below clearly and succinctly using complete sentences.
In November of 2020, 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 (80% to land and 20% to equipment and warehouse), while the CFO argues that they should allocate the bulk of the purchase cost to the equipment and warehouse (80% equipment & warehouse, 20% land) because "no one wants property in Scranton." The same depreciation methods are used for financial reporting and tax purposes, and assume tax rates won't change over the foreseeable future.
And 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.
- 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?
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