Financial Accounting - Land and Building Allocation Analysis Report

This report analyzes the financial accounting treatment of land and building allocation, specifically focusing on a scenario where a company, Josh, allocates the purchase price of a property between land and building. The report examines the potential reasons behind this allocation, such as tax benefits through depreciation of the building and the possibility of a higher future selling price. It then assesses the ethical implications of this allocation, highlighting that it violates Generally Accepted Accounting Principles (GAAP) and constitutes potential fraudulent financial reporting. The report concludes that the allocation is unethical as it distorts the true financial position and performance of the company, potentially leading to penalties. The analysis draws on concepts such as depreciation, tax benefits, and the importance of fair financial reporting, referencing scholarly articles to support its conclusions.

RUNNING HEAD: FINANCIAL ACCOUNTING
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Financial Accounting

Financial Accounting
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1. One possible reason for recording the purchase this way could be that the building is
depreciable assets. However, the land is non-depreciable assets. In the books, the
purchase of land at $ 900,000 helps to get the tax benefits as calculation of income tax to
be paid is done after deducting depreciation and amortization expenses. With this
amount, Josh could deduct more depreciation on building that reduces the net income and
hence would reduce the income tax amount to be paid (Zhou, 132). On the other side, the
land is non-depreciable assets that mean no depreciation could be charged on land. Due
to that amount of land recorded by Josh is less than the market rate allocation. Another
reason could be that the valuation of the building depends on market variations higher
amounts in books could help Josh to get a higher amount at the time of sale. Hence, two
reasons for recording the purchase this way could be tax benefit and higher selling price
of building in the near future.
2. No, the allocation done by Josh is not ethical; Josh violated the concept of generally
accepted accounting principles. This unethical behavior is considered as the fraudulent
financial reporting or as disclosure violations that mean “errors of ethical omission”
(Sedki, Posada and Pruske, 18). The step taken by Josh would be unethical in accordance
with GAAP. As because of the wrong allocation the purpose of financial statements
cannot be met that include disclosure of information to stakeholders in a fair manner
(Sedki, Posada and Pruske, 22). Hence, the allocation of assets done by Josh would be
unethical and could lead to a higher penalty on Josh.

Financial Accounting
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References
Sedki, S. Sam, George A. Posada, and Kimberly A. Pruske. "Differences Between US GAAP
and IFRS in Accounting for Goodwill Impairment and Inventory: Tax Treatment Under the
Internal Revenue Code." Journal of Accounting and Finance 18.4 (2018).
Zhou, Mingjun. "Does accounting for uncertain tax benefits provide information about the
relation between book-tax differences and earnings persistence?." Review of Accounting and
Finance (2016).