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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883

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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883
Textbook Problem

Ethics and professional conduct in business
Phil Fritz is a financial consultant to Magna Properties Inc., a real estate syndicate. Magna Properties Inc. finances and develops commercial real estate (office buildings). The completed projects are then sold as limited partnership interests to individual investors. The syndicate makes a profit on the sale of these partnership interests. Phil provides financial information for the offering prospectus, which is a document that provides the financial and legal details of the limited partnership offerings. In one of the projects, the hank has financed the construction of a commercial office building at a rate of 7% for the first four years, after which time the rate jumps to 9% for the remaining 21 years of the mortgage. The interest costs are one of the major ongoing costs of a real estate project. Phil has reported prominently in the prospectus that the break-even occupancy for the first four years is 48%. This is the amount of office space that must be leased to cover the interest and general upkeep costs over the first four years. The 48% break-even is very low and thus communicates a low risk to potential investors. Phil uses the 48% break-even rate as a major marketing tool in selling the limited partnership interests. Buried in the fine print of the prospectus is additional information that would allow an astute investor to determine that the break-even occupancy will jump to 92% after the fourth year because of the contracted increase in the mortgage interest rate. Phil believes prospective investors are adequately informed as to the risk of the investment.
Comment on the ethical considerations of this situation.

To determine

Concept introduction:

Ethics and Professional conduct:

These are a type of set principles and guidelines which provides standards for making judgment in business and in the action of professionals in the business.

To comment:

About the ethical considerations on the scenario discussed in the question.

Explanation

The company is working in the segment of real estates in which they finance and develop the commercial estates. Now, in one of the projects of the company, bank has financed mortgaged a loan at 7% which will after the end of four years will be raised to 9% foe the remaining period of 21 years.

Further, the company reported the break-even point of the project to be 48% for the first four years as the interest rate component is

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