Sal Shirey is an owner of a small business. His company has recently borrowed a large amount of funds to finance the construction of a large building addition, as well as, the purchase of equipment and machinery. Shirey's banker requires him to submit quarterly financial statements so that he can monitor the financial health of his business. The bank has warned that if profit margins decline, the interest rate on the loan may need to be increased in order to reflect additional risk. Shirey knows that profit may decline this year. As he is preparing the year-end adjusting entries, Sal decides, for depreciation purposes, to treat all long-term asset purchases as though they occurr on the first day of the month following the month of purchase. 1. Is there an ethical issue with the implementation of this rule? If so, what is it?2. When should depreciation first be recorded?3. What impact will Shirey's approach to recording depreciation have on the financial statements?

Question

Sal Shirey is an owner of a small business. His company has recently borrowed a large amount of funds to finance the construction of a large building addition, as well as, the purchase of equipment and machinery. Shirey's banker requires him to submit quarterly financial statements so that he can monitor the financial health of his business. The bank has warned that if profit margins decline, the interest rate on the loan may need to be increased in order to reflect additional risk. Shirey knows that profit may decline this year. As he is preparing the year-end adjusting entries, Sal decides, for depreciation purposes, to treat all long-term asset purchases as though they occurr on the first day of the month following the month of purchase.
1. Is there an ethical issue with the implementation of this rule? If so, what is it?
2. When should depreciation first be recorded?
3. What impact will Shirey's approach to recording depreciation have on the financial statements?

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