Boston Company recently purchased land and a building in a downtown district where land values are rapidly increasing. Archie, the CFO and Edith, the controller are meeting to allocate the lump sum purchase price between the land and the building. Aware that depreciation can only be taken on the building, Edith favors placing a larger share of the purchase price on the building, thus increasing annual depreciation expense and decreasing taxable income and income taxes and therefore increasing cash flow. Archie, the CFO, (and Edith’s boss) argues that the market value of the land is increasing faster than the value of the building. Besides, Archie says GAAP net income will be negatively affected by the additional depreciation and will cause the company’s stock price to go down. 1) Who are the stakeholders in this situation? And what interests are in conflict for each stakeholder?
2) What ethical issues does Edith face?
3) What ethical issues does Archie face?
4) How should this ethical dilemma be resolved and how should these costs be allocated?