Concepts of depreciation

Concepts of depreciation
Floi Choi owns a small business and manages its accounting.
Her company just finished a year in which a large amount of borrowed funds was
invested in a new building addition as well as in equipment and fixture
additions. Choi’s banker requires her to submit semiannual financial statements
so he can monitor the financial health of her business. He has warned her that
if profit margins erode, he might raise the interest rate on the borrowed funds
to reflect the increased loan risk from the bank’s point of view. Choi knows
profit margin is likely to decline this year. As she prepares year-end
adjusting entries, she decides to apply the following depreciation rule: All
asset additions are considered to be in use on the first day of the following
month. (The previous rule assumed assets are in use on the first day of the
month nearest to the purchase date.)
1.)
Identify decisions that managers like Choi must
make in applying depreciation methods.
2.)
Is Choi’s rule an ethical violation, or is it a
legitimate decision in computing depreciation?
3.)
How will Choi’s new depreciation rule affect the
profit margin of her business?