Reference no: EM13689065

Question 1. When managers acquire new assets a number of decisions relative to depreciation must be made. Specifically, the asset must be assigned a useful life, a salvage value, and a method of depreciation.

Question 2. When assets are placed in use on a day other than the first day of the month an assumption is often made that the assets are placed in use on the first day of the month nearest to the date of the purchase. For example, for assets purchased on the 1st through 15th days of the month, the first day of the month is assumed to be the purchase date. For assets purchased on the 16th through month-end, the first day of the next month is assumed to be the purchase date.

By selecting the first day of the following month, Choi is getting a one-time deferral of some partial months of depreciation. She is still employing a systematic and rational method of allocating costs if she consistently chooses the first day of the following month. However, since she appears to be using this method only with respect to current year additions, it appears that she is using accounting rules to reduce depreciation expense this year. Also, her practice is not in keeping with general business practices as described above. The facts of the situation seem to suggest an ethical violation rather than a legitimate depreciation decision rule.

Question 3. By always assuming the first day of the following month as the date of purchase, less depreciation is (initially) accrued for the assets employed. This means depreciation expense will be less than if assets were considered employed on the first of the month closest to the date of purchase. With reduced depreciation charges, net income will be higher for this current year. Therefore, this practice will result in a higher profit margin for her company for this year.