Question: In this case we are asked to explore the appropriate application of Generally Accepted Accounting......

Question: In this case we are asked to explore the appropriate application of Generally Accepted Accounting... In this case we are asked to explore the appropriate application of Generally Accepted Accounting Principles pertaining to Capitalization of Costs vs. the Expensing of Costs....A COST represents the value exchanged for the ASSET or the benefit received from monies disbursed.....now....how do we interpret the benefits received.....are there future benefits??? or Are the benefits concurrently expired upon acquisition???? So this becomes the basis of many issues pertaining to the accurate interpretation of a guideline in concert with the business transaction under analysis.....It is our responsibility to ensure we meet the needs of our clients without undermining the initial intention of the guideline....So then we are faced with issues pertaining to LOOPHOLES....Is it appropriate for us...as ethical accounting professional, to attempt to find creative ways to essentially circumvent the regulatory restriction.....Are we able to meet both the needs of our clients and the integrity of our profession???? So now you are asked to interpret an issue related to Capitalization vs Expensing for the TRUMP International Corp.....Craft your response carefully including all of the resources you investigated as you crafted your response. Trump International Construction Company is building a hotel for speculative purposes. That is, the Company has not yet found a buyer for the hotel, but expects to do so within a few months. Trump International expects to spend about another two years to complete construction of the hotel borrows $25,000,000 at 5.5% on Jan 1, 2017 and commences building the hotel. The land was purchased in 2016 for $5,000,000 and has property taxes of $4,000,000 per year. Trump incurs building and construction costs of $12,000,000 for 2017 and 2018. Trump International seeks advice from you, as their accountant, if the interest on bank loan and property taxes associated with this construction site should be capitalized or expensed. Required: Conduct research on the fundamentals of reporting a Cost as an Asset (Capitalized) vs. an Expense and prepare a memo advising the client of your advice. What should the value of the Hotel be reported on the Financial Statements at Dec 31, 2017? Is it relevant that the hotel is being constructed on speculation rather than for a particular customer? Include the regulatory requirements you researched in order to craft your answer and site your specific GAAP, FASB, IRS and or other Regulatory Pronouncements you consulted.

Expert Solution

As per the generally accepted accounting principles, all those cost which are incurred till the asset is ready to use for its intended use should be capitalised and should not be recognised as an expense in the Revenue account. Thus, all the trial and run expenses, interest cost incurred till the asset is ready to use should be capitalized.

In the given case, since the asset i.e. hotel building is not ready for its use, thus the borrowing cost incurred till the asset is ready to use should be capitalized. What we have to seen is the passive use i.e. should be ready to use and the active use i.e. actual use of the asset is not necessary.

Thus on the basisi of above principle, the total cost of the building is:

Cost of construction= 12000000

Cost of Land = 5000000

Borrowing Cost for 2 yrs= 1870000

Property Tax= 8000000

Total Cost of Building= $26870000

In my views there is no issue for the company to construct the hotel building on speculation basis if it probable for the company that it can sell the building in the near future.

ekkarill92 answered 1 year ago

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