Q4CA. - Intermediate Accounting (Kieso)

Question

(Presentation of Property, Plant, and Equipment) Carol Keene, corporate comptroller for Dumaine Industries, is trying to decide how to present “Property, plant, and equipment” in the balance sheet. She realizes that the statement of cash flows will show that the company made a significant investment in purchasing new equipment this year, but overall she knows the company’s plant assets are rather old. She feels that she can disclose one figure titled “Property, plant, and equipment, net of depreciation,” and the result will be a low figure. However, it will not disclose the age of the assets. If she chooses to show the cost less accumulated depreciation, the age of the assets will be apparent. She proposes the following.

Particular	Amount \(
Property, Plant, and Equipment (net of depreciation)	\)10,000,000

Rather than

Particular	Amount \(
Property, Plant, and Equipment	\)50,000,000
Less: Accumulated depreciation	(40,000,000)
Net book value	$10,000,000

Instructions 

Answer the following questions. 

(a) What are the ethical issues involved? 

(b) What should Keene do?

Step-by-Step Solution

Answer

(a) Ethical issues involved non-representation of accumulated depreciation.

(b) Keene must report accumulated depreciation as well along with the value of the asset

Definition of Misrepresentation

Misrepresentation can be defined as the activity in which the business entity does not report the actual value of the assets and liabilities to influence the investors and users of the financial statement.

Ethical Issued involved

Keene has decided to represent the amount of property, plant, and equipment in the balance sheet as net of accumulated depreciation. Non-representation of the accumulated depreciation in the balance sheet will hide the actual age of the assets, and the business will look more efficient.

Procedure to be Followed

Keene must report property, plant, and equipment and accumulated depreciation separately. It will provide full information and facts about the business entity’s assets, and it will be considered an ethical way of representing assets in the balance sheet.