Question

Categorizing Selling and Administrative expenses on a multi-step income statement.

Tammy's Cookies store sells Cookies. Categorize 'Selling expense,' 'Administrative expense', or 'Other expense.' Please explain reasoning

1) There is a rebate at the top of the box of cookies: the purchasers can cut this rebate and send it in for $1. Incurred "Rebate expense";

2) Tammy's Cookies leased a new space and upgraded the space earlier this year. This incurred "Leasing Expense" and "Depreciation Expense - leasehold improvements."

3) Tammy's Cookies had more stock of cookies for the holidays, so they rented a storage. "Rent Expense of store facility"

4) Tammy's Cookies believes there was an impairment on the store due to the location of the store. "Loss on Impairment."

Answer 1

Accounting standard, does not prescribe anything for classification of expense. Presentation of expenses in profit or loss in a way that provides more reliable and relevant information about your own activities.

In the given situation,

1. Rebate expense - Is treated as Selling expense as it is directly relating to the sale of product, even purchaser has an option to cut this rebate. Even in general rebate is not provided to everyone, it will be provided only if certain conditions relating to sale are met (such as quantity, payment in time etc.)

2. Leasing expense and Depreciation expense - These are treated as Administrative expense, as the new lease space is used for production of cookies and not directly related to selling operation. It will be a fixed operation cost so it is not considered in cost of goods sold directly also

3. Rent expense or store facility - This is treated as Selling expense, as renting of a storage related to after production activity, so it will be treated as selling instead of admin expense

4. Loss on impairment - As rent expense of warehouse is treated as selling expense, impairment loss on same asset will also be treated as Selling expense.