Question

ABC Company purchased $700,000 of vacant land one block from the College World Series Stadium which it intends to use for parking. The Company spent $300,000 this year to prepare the land for paving and $250,000 to actually pave the land. The Company is quite profitable so Management has decided to record the entire cost of the land, all of the costs to prepare the land for paving, and all of the paving costs in the Repairs and Maintenance Expense account. What is the effect of this decision on the Company's net income? What is the effect on the Balance Sheet. What is the effect on the tax return? Is this the appropriate treatment of the cost of the land and paving costs? Are the actions of Management ethical? Justify your response.

Answer 1

ANSWER:

• The impact of organization's choice to record the whole expense of the land, the entirety of the expenses to set up the land for clearing, and the entirety of the clearing costs in the Repairs and Maintenance Expense record will be as per the following .
• (A) The total compensation will be downplayed by $ 1,250,000 as the whole expense of Land and clearing is charged as fixes and Maintenance Expense.
• (B)To be decided Sheet, both the Asset Value and the held income will be downplayed by $ 1,250,000. Therefore whole monetary record will be downplayed.
• (C)Assessable Income will likewise be decreased by $ 1,250,000, as the Cost of land is charged as cost.
• (D) This isn't the proper treatment to cost the expense of land and clearing. The Land ought to be recorded as an Asset in the books of Accounts. All the expenses brought about to change over the land reasonable for its planned use ought to be added to the expense of Land. So the costs identified with pavings likewise ought to be treated as cost of land.
• (E) The activities of the board are not moral as these activities shroud the real salary of the organization and dishonestly avoids the expense obligation. Additionally the Balance sheet and Income proclamation won't show the reasonable image of Financial situation of the organization.