(Cost of Land vs. Building) Field Company purchased a warehouse in a downtown district where land values are rapidly increasing. Adolph Phillips, controller, and Wilma Smith, financial vice-president, are trying to allocate the cost of the purchase between the land and the building. Noting that depreciation can be taken only on the building, Phillips favors placing a very high proportion of the cost on the warehouse itself, thus reducing taxable income and income taxes. Smith, his supervisor, argues that the allocation should recognize the increasing value of the land, regardless of the depreciation potential of the warehouse. Besides, she says, net income is negatively impacted by additional depreciation and will cause the company's stock price to go down.
1. What stakeholder interests are in conflict?
2. What ethical issues does Phillips face?
3. How should these costs be allocated?© BrainMass Inc. brainmass.com June 3, 2020, 10:35 pm ad1c9bdddf
How should these costs be allocated?
The company purchased both the land and building together, which is considered a parcel. Since it was purchased in this manner the sale value of the land near to the company's land can be used as the basis and will be subtracted from the total parcel value to help determine the value of the building. Since the land prices are increasing rapidly you can use the contribution to value method to determine how the costs ...
This assignment discusses the cost of land vs. building for the Field Company. It examines how the costs should be allocated, the stakeholder interests in conflict, and ethical issues. The solution is about 340 words.