Your company has just finished a year in which a large amount of borrowed funds was invested in a new building addition as well as in equipment. Your banker requires you to submit semiannual financial statements so he can monitor the financial health of your business. He has warned you that if your profit margin erodes he might have to raise your interest rate on borrowed funds to reflect the increased loan risk. You know your profit margin will very likely decline this year. As you prepare for the year-end adjusting entries, you decide to apply the following depreciation rule: All asset additions are considered to be in use on the first day of the following month.
1. Is your new depreciation rule an ethical violation, or is it a legitimate decision in computing depreciation?
2. How will your new depreciation rule affect the profit margin of the business?