Question

You are the CFO of Thunderduck Energy, Inc, a public company that specializes in the exploration and development of natural gas. It's near year-end, and you have been in several meetings with management to discuss the end of year net income projections. The company’s employees receive a bonus if the company’s net income in the current year exceeds the net income from the past year. For the current year, the earnings have not been as strong as expected and net income may fall short of last year’s income.

The President has an idea to ensure that net income will increase this year so that the employees will earn their bonus and the shareholders will be happy. The President wants to discuss routine maintenance costs on equipment that were incurred this year. These costs were treated as an expense on the income statement. However, the President is proposing that these costs can be capitalized and should be accounted for as a long-term asset on the balance sheet in order to boost the company’s net income.

Required:

Draft a one-page response in the form of a business memo to your manager discussing your recommendation on the President’s suggestion to capitalize the maintenance costs and record the costs as a long-term asset. Support your decision with addressing the accounting issue, the parties affected and what factors you considered to make your decision. Your memo will be graded based on the written communication, critical thinking and ethics rubrics.

Answer 1

Dear President,

According to Me, It is Not acceptable to consider Maintenance Cost As Long-Term Cost Due The following.

Before Going to My Answer Lest Me Explained to you what is capital Asset, what is Maintenance cost and what is capital expenses  

Capital Assets

Capital Assets are those assets used by the company to make profit more than one revenue-generating cycle. These assets are fixed in nature and used in company's production process more than on year. Machinery and equipment, furniture building etc are examples of Capital assets or non-current assets of the company..

What Is Maintenance a Cost?

Maintenance and Repairs cost are those cost incurred by the company to get back the equipment into such a condition what was it had in the last financial year and these expenses are recurring nature and it will only provide benefit to the company for next one year only.

Capital Expenses

       Capital Expenses are those expenses incurred by a company which will give benefit to the company for more than one accounting period only such cost can be considered as the long-term expenses of the company and show in the balance sheet.

Conclusively as matinee cost are recurring in nature and it will not provide income to the company for more than one year, in my opinion, it is not fair to treat Maintenance cost as long Time expense.

Thanks, and Regards.

CFO