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Intermediate Accounting I Ethics Question (20 pts. for content; 10 pts. for communication): Thank you very much!

In January 2018, Dunder Mifflin Inc. bought property in downtown Scranton. The property contains land, a warehouse, and some limited equipment. Property values in the area have been increasing rapidly over the past decade. The price paid for the property needs to be allocated to the items purchased and the controller and financial vice president are having that discussion. Dunder Mifflens controller wants to allocate the largest proportion of the cost to the warehouse and equipment while the financial VP, David Wallace, argues that the allocation should recognize the steadily increasing value of the land by allocating the highest value to the land. Assume that the same depreciation methods are used for financial and tax return purposes.

1. Under generally accepted accounting principles, how should the total cost of the property be determined? (2 pts.)

2. Why is there any question about how much of the purchase cost should be allocated to each of the assets? How should the purchase cost be allocated to each of the assets? (4 pts.)

3. What are the pros and cons of a proportionally higher allocation of the purchase cost to the land and a proportionally lower allocation to building and equipment? (8 pts.)

4. Assume the equipment and warehouse have the same useful life. The company plans to sell the equipment after it has been fully depreciated and the land will be sold after the warehouse is fully depreciate Assuming no change in tax rates over the life of the warehouse, how will this allocation decision affect Retained Earnings in the long-run, after the assets have been sold? Explain in depth. (6 pts.)

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