Question

Barnyard Construction sells and erects barn-shaped shell houses, that is, frame buildings that are finished on the exterior but are unfinished on the interior except for studded partition walls and flooring. These shells are sold to people who are have the time and skills to finish the homes themselves. > A ) Discuss ) Module ) Course Barnyard buys materials to build shell houses in kits from a manufacturer. When beginning business in an area, Barnyard buys land as a site for its local warehouse, office, and displays. Display houses are built at a cost from $ 0,000 to $60,000 which includes the cost of labor and materials. Old display houses are torn down after 3 to 7 years. Sample display houses have no salvage value. Instructions Hypothetically, the costs of the display houses could be (1) expensed in the periods in which the expenditure is made or (2) spread over more than one period. Discuss the advantages of each method.

Answer 1

The advantage of expensing the entire cost in the period in which expenditure is made are :-

1. First of all this method is very simple and easy to use without any complexity.

2 . If it is to be expenses in different periods then selecting the relevant period to be used for expensing would be a difficult task and may involve individual objectivity.

Advantages of spreading over more than one period :-

1 . Since the salvage life of display houses are torn down only after 3 to 7 years only if they are not sold this it would be quite logical to spread their cost.

2. It takes time to build display house for more than one period thus thus spreading of their cost will be just.

3. If the cost will be shown in a single period then it will show a very distorted profit and loss account, since cost incurred on display houses is high and involves expenses incurred in different different periods since it takes time to build them.

4 . Spreading their cost either on the basis of percentage of completion method or spreading cost to the life of these houses will lead to showing true and fair view of financial statements .