Question

Based on the actual circumstances, this mini case illustrates an issue faced by the government operated utilities.

The city electric utility, which a city accounts for its enterprise phones, provides cash rebates to customers who install insulation, storm windows, or energy saving appliances. The payments are intended to reduce the demand for the true city and thereby enabling the CEU to avoid having to add Generating capacity.

Like many governments operated utilities, the see CEU establishes rates based on a number of factors, of which cost is only one. It is the policy of the city, for example, to make substantial transfers each year from the CEU to its general fund. Utility fees or hereby a form of taxation, and the revenue requirements of the general fund are taken into account in setting the rates.

The CEU comptroller has risen the question of whether the rebate should be charged as an expense has paid or be capitalized and charged as an expense over time (I.e. be amortized). Moreover, he then asked what the bases should be for eternity the length of the amortization period.

Write a brief memo in which you recommend to the CEU comptroller how the rebate should be accounted for. Be sure to support your position.

Answer 1

To : Micheal Clark, CEU Comptroller

From : Ricky pointing, Accounts manager, CEU

Re : Basis of charging rebate

The issue raised by you whether to charge rebate that we offer customers to encourage them to use energy saving equipment, as an expense immediately or to capitalize it and then amortize it has been researched by our team for quite a time and we all reached to a conclusion that instead of showing it as an expense immediately, it would be better to first capitalize it and then amortize it over the years.

Since such rebate is allowed so that energy consumed by the customers reduce substantially and this as a result of which demand for electricity also reduce and then there will be no need to employ facilities for additional capacity, this there will be savings by not employing additional facilities. Accordingly, rebate should be amortized In the same proportion as the expected useful life of those additional facilities. So we have to first find out what would have been the expected useful life of those facilities and accordingly rebate shall be amortized by dividing the total rebate with those expected number of years.

Ricky Ponting

Accounts manager, CEU