Hamlin Company has purchased land and a warehouse for $18,000,000. The warehouse is expected to last 20
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The controller disagrees. She argues that the smallest amount possible, say one-fifth of the purchase price, should be allocated to the land because the depreciation of the warehouse, which is tax-deductible, would be greater and thus reduce income taxes.
Under this plan, annual depreciation would be $648,000 [($14,400,000 – $1,440,000) ÷ 20 years]. The annual tax savings at a 30 percent tax rate is $32,400 [($648,000 − $540,000) x 0.30].
How would each decision affect the company’s cash flows? Ethically, how should the purchase cost be allocated? Who would be affected by the decision?
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Principles of Accounting
ISBN: 978-1133626985
12th edition
Authors: Belverd E. Needles, Marian Powers and Susan V. Crosson
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