In January 2018, the Paper Division of Dunder Mifflin Inc.purchased a piece of property...

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Accounting

In January 2018, the Paper Division of Dunder Mifflin Inc.purchased a piece of property in Scranton, Pennsylvania for$475,000. Other fees associated with the purchase, includingclosing costs and realtor commissions, totaled $25,000. Theproperty contains land, a warehouse, and equipment. The VicePresident of the Paper Division, Andy Bernard, and the ChiefFinancial Officer of Dunder Mifflin, Oscar Martinez, are discussinghow the cost of the property should be allocated to the itemspurchased. The VP of the Paper Division, Andy Bernard, wants toallocate most of the cost to the land, while the CFO argues thatthey should allocate the bulk of the purchase cost to the equipmentand warehouse because “no one wants property in Scranton.” Assumethat the same depreciation methods are used for financial reportingand tax purposes, and tax rates won’t change over the next 10years.
Andy Bernard is hoping to be promoted to the VP of the PrinterDivision, which is a much larger division than the Paper Division.A key determinant of whether Bernard will be promoted is theprofitability of the Paper Division over the next two years.
What are the pros and cons of a proportionally higherallocation of the purchase cost to the land and a proportionallylower allocation to the land? (4 pts.)
Why do you suppose Andy Bernard wants to allocate most of thecost to the land? (6 pts.)
What is your recommendation for allocating the purchase coststo the assets? (6 pts.)
Assume the equipment has a useful life of 5 years and thewarehouse has a useful life of 10 years. The company plans to sellthe equipment after it has been fully depreciated and the land andwarehouse will be sold after the warehouse is fully depreciated.How will this allocation decision affect ending Retained Earningsat the end of the 10^th year, after the assets have beensold? (4 pts.)

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4.2 Ratings (905 Votes)

1 Land is never depreciated So the company cant charge depreciation on the income statementProportionally higher allocation to Land would mean that Depreciation charge is lost on that part resulting in higher income Whereas lower allocation to land means depreciation can be See Answer

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In: AccountingIn January 2018, the Paper Division of Dunder Mifflin Inc.purchased a piece of property in...In January 2018, the Paper Division of Dunder Mifflin Inc.purchased a piece of property in Scranton, Pennsylvania for$475,000. Other fees associated with the purchase, includingclosing costs and realtor commissions, totaled $25,000. Theproperty contains land, a warehouse, and equipment. The VicePresident of the Paper Division, Andy Bernard, and the ChiefFinancial Officer of Dunder Mifflin, Oscar Martinez, are discussinghow the cost of the property should be allocated to the itemspurchased. The VP of the Paper Division, Andy Bernard, wants toallocate most of the cost to the land, while the CFO argues thatthey should allocate the bulk of the purchase cost to the equipmentand warehouse because “no one wants property in Scranton.” Assumethat the same depreciation methods are used for financial reportingand tax purposes, and tax rates won’t change over the next 10years.Andy Bernard is hoping to be promoted to the VP of the PrinterDivision, which is a much larger division than the Paper Division.A key determinant of whether Bernard will be promoted is theprofitability of the Paper Division over the next two years.What are the pros and cons of a proportionally higherallocation of the purchase cost to the land and a proportionallylower allocation to the land? (4 pts.)Why do you suppose Andy Bernard wants to allocate most of thecost to the land? (6 pts.)What is your recommendation for allocating the purchase coststo the assets? (6 pts.)Assume the equipment has a useful life of 5 years and thewarehouse has a useful life of 10 years. The company plans to sellthe equipment after it has been fully depreciated and the land andwarehouse will be sold after the warehouse is fully depreciated.How will this allocation decision affect ending Retained Earningsat the end of the 10th year, after the assets have beensold? (4 pts.)