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Jim Reed: How would an organization prevent this fraud?

Jim Reed manages a fleet of utility trucks for a rural county government. He's been in his job 30 years, and he knows where the angles are. He makes sure that when new trucks are purchased, the salvage value is set as low as possible. Then, when they become fully depreciated, they are sold off by the county at salvage value. Jim makes sure his buddies in the construction business are first in line for the bargain sales, and they make sure he gets a little something back. Recently, a new county commissioner was elected with vows to cut expenses for the taxpayers. Unlike other commissioners, this man has a business degree, and he is coming to visit Jim tomorrow.

Requirements
1.When a business sells a fully depreciated asset for its salvage value, is a gain or loss recognized?
2.How do businesses determine what salvage values to use for their various assets? Are there "hard and fast" rules for salvage values?
3.How would an organization prevent the kind of fraud depicted here?

Solution Preview

1.When a business sells a fully depreciated asset for its salvage value, is a gain or loss recognized?

When the proceeds equal the book value, there is no gain or loss. "Fully depreciated" does not mean zero book value - it means the asset has been depreciated down to the salvage value. So, selling an asset that is fully depreciated for exactly the salvage would result in no gain or loss.

2.How do businesses determine what salvage values to use for their various assets? Are ...

Solution Summary

Your tutorial is 341 words and tells how to both find this type of antic and how to prevent it in the first place. A reminder of how selling of used assets works is included.

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