Question

During the last part of 2019, Cooper Ltd. incurred $200,000 of costs for a new addition to their building.  The building now has much more space for office staff (who moved in December 23^rd) and should last for at least 25 years. The bookkeeper expensed all of the addition costs in 2019.

Required:

1. What is the financial accounting issue?  State as an issue statement/question as done in class.  
2. What are the implications/impact of the issue to the 2019 financial statements?
3. What is your recommendation for the financial accounting issue?
4. Why did you recommend this? Support your answer using GAAP conceptual framework principles and applying to the Cooper Ltd. situation.

Answer 1

Answer a)

As per the given information , Copper Ltd , incurred an expenditure of $ 200000 , at the end of year 2019 ; on new addition to the existing building. The building , now , can accommodate more office staff into it and the life is expected to be around 25 years.

The study of the expenditure is as under :

1. This expenditure has been incurred on new addition to the building
2. This expansion has created more space for office staff.
3. The life is expected to be 25 years .
4. The Accountant expensed it out in the year 2019.

As per the study of the expenditure incurred, it seems to be a Capital Expenditure and should be capitalized as Building. The financial impact has inflated the Profit / Loss of Copper Ltd. It has wrongly been shown as an expenditure instead of capitalizing it into the Balance Sheet.

Correctly, it should be added to the Building and the corresponding depreciation for the period from 23^rd December,2019 ( because it would be called as “put to use ” , when the Asset because usable ) and charged to Profit & Loss Account.

Answer b)

The impact over the Profit & Loss account is $ 200000 less the pro-rata depreciation for the corresponding period by which the Profit has been shown reduced and impact goes to Balance Sheet and less amount goes to Retained Earnings , which are available for the Stock holders.

Answer c)

Our recommendation in this regard to reverse the entries done and correctly do as below:

1. Reverse the entries done till now
2. Capitalize the Building at $ 200000
3. Date of Capitalization should be 23^rd December,2019
4. Pro rata depreciation for the period 23^rd December,2019 to 31^st March,2019 ( of in case of a calendar year , upto 31^st December,2019) to be charged to building and the Depreciation is charged to Profit & Loss Account.
5. The Impact of present entries done till date are – inflated Profit & Loss account , misrepresentation of Balance Sheet ; Wrong Accounting issues and the Auditor may qualify the report as well.

Answer d)

We recommend this as per following GAAP provisions / guidelines

• Generally accepted accounting principles require the capitalization of costs when a future benefit for the expenditure exists. ... In this case, the company would not capitalize the cost, but would instead book an expense. It is important to remember that these are general rules, and GAAP is well known for its exceptions.
• Under GAAP, companies can capitalize land and equipment improvements as long as they aren't part of normal maintenance. GAAP allows companies to capitalize costs if they're increasing the value or extending the useful life of the asset.
• In accounting, the cost of an item is capitalized on a company's balance sheet if the company expects to consume the item over a long period of time. Rather than being expensed, the cost of the item or fixed asset is capitalized and amortized or depreciated over its useful life.
• In accounting, the cost of an item is capitalized on a company's balance sheet if the company expects to consume the item over a long period of time. Rather than being expensed, the cost of the item or fixed asset is capitalized and amortized or depreciated over its useful life.