Reference no: EM132558776

Question - Monster Inc. has purchased a building for $5,000,000. The firm has two appraisals performed, with the first appraisal estimating that the land should have been 20% of the purchase price allocated to it, While the second appraisal suggest that 40% of the purchase price should be allocated to it. It is further estimated that the building has a 20 year useful life with a $50,000 salvage value. The CEO compensation (more specifically for his bonus) is based on firm's performance, as measured by return on assets and net income. The board of directors is concerned that the CEO may be opportunistically selecting a depreciation method that will increase his compensation in the near term, as opposed to choosing a depreciation method that more accurately matches the cost of the assets over its revenue producing life.

Required -

1. If the first chose to use the 1st appraisal how would that affect the return on assets during the first 3 years of the buildings life relative to if it instead uses the 2nd appraisal?

2. If the firm chose to use straight line depreciation how would that affect return on assets during the first 3 years of the building to if it uses double declining balance?