Burke Ellzey
Case 2 The primary problem faced by this staff auditor is whether King Realty properly calculated the depreciation on the houses. The controller did not calculate depreciation for the first five years of the useful life of the rental houses. Also, the controller did not calculate depreciation when nobody was living in the house. The alternative would have been to calculate depreciation over the entire useful life not excluding the first five years, and including the time when nobody is living in the houses. The controller argues that since the purpose of depreciation is to measure the “using up” of an asset, no depreciation should be recorded because the usefulness of the asset actually increase during the first five years. Also, the controller argues that since no revenue is being generated when the house is vacant, no depreciation expense should be recognized. Accounting Standards Codification (ASC) No. 360-10-35-4 states that “the cost of a productive facility is one of the costs of the services it renders during its useful economic life. Generally accepted accounting principles (GAAP) require that this cost be spread over the expected useful life of the facility in such a way as to allocate it as equitably as possible to the periods during which services are obtained from the use of the facility. This procedure is known as depreciation accounting, a system of accounting which aims to distribute the cost or other basic value of tangible capital assets, less salvage (if any), over the estimated useful life of the unit (which may be a group of assets) in a systematic and rational manner.” Furthermore, Accounting Standards Codification (ASC) No. 360-10-35-49 states “a long-lived asset that has been temporarily idled shall not be accounted for as if abandoned.” Therefore, the depreciation methods used by King Realty are improper. The proper