John Dillworth is in charge of buying property used as building sites for branch offices of the National Bank of Commerce. Mr. Dillworth recently paid $110,000 for a site located in a growing section of the city. Shortly after purchasing this lot, Mr. Dillworth had the opportunity to purchase a more desirable lot at a significantly lower price. The traffic count at the new site is virtually twice that of the old site, but the price of the lot is only $80,000. It was immediately apparent that he had overpaid for the previous purchase. The current market value of the purchased property is only $75,000. Mr. Dillworth believes that it would be in the bank’s best interest to buy the new lot, but he does not want to report a loss to his boss, Kelly Fullerton. He knows that Ms. Fullerton will severely reprimand him, even though she has made her share of mistakes. In fact, he is aware of a significant bad loan that Ms. Fullerton recently approved.
When confronted with the bad debt by the senior vice president in charge of commercial lending, Ms. Fullerton blamed the decision on one of her former subordinates, Ira Sacks. Ms. Fullerton implied that Mr. Sacks had been dismissed for reckless lending decisions when, in fact, he had been an excellent loan officer with an uncanny ability to assess the creditworthiness of his customers. Indeed, Mr. Sacks had voluntarily resigned to accept a better position.
Required
a. Determine the amount of the loss that would be recognized on the sale of the existing branch site.
b. Identify the type of cost represented by the $110,000 original purchase price of the land. Also identify the type of cost represented by its current market value of $75,000. Indicate which cost is relevant to a decision as to whether the original site should be replaced with the new site.
c. Is Mr. Dillworth’s conclusion that the old site should be replaced supported by quantitative analysis? If not, what facts do justify his conclusion?
d. Assuming that Mr. Dillworth is a certified management accountant (CMA), do you believe the failure to replace the land violates any of the standards of ethical conduct in Exhibit 10.14 in Chapter 10? If so, which standards would be violated?
e. Discuss the ethical dilemma that Mr. Dillworth faces within the context of Donald Cressey’s common features of ethical misconduct that were outlined in Chapter 1.