Question

In: Economics

Indicate whether each of the following statement is true, false, or uncertain, and justify your answer....

Indicate whether each of the following statement is true, false, or uncertain, and justify your answer.
(a) If a company can choose to treat the cost of developing new software as capital expense or current expense for tax purpose, the company would treat it as capital expenses so that it is counted as investment.
(b) Capital goods purchases are deducted both in the current VAT scheme in Korea and in the corporation income tax.
(c) Theoretically, conditional grant and unconditional grant will have the same effect on the local government's expenditure for specified purpose as long as the expenditure for specified purpose is greater than the amount of grant.

Solutions

Expert Solution

a) Cost of developing new software is an investment in the long-term cash flow generation of the company, and as such should be capitalized, not expensed. The same cost is very often not stable from year to year, and this creates material and directionally different changes in profit measures. Without capitalizing the cost, a firm’s earnings can be materially understated because the traditional calculation of PAT does not recognize the firm’s material investments in developing new software as part of its operating investments. This violates one of the core principles of accounting, where expenses should be recognized in the period when the related revenue is incurred.

So the statement is true.

b)A corporate income tax is a direct tax imposed by the jurisdiction of Korea on the income or capital of corporations or analogous legal entities. Capital goods are goods that are used in producing other goods, rather than being bought by consumers. So, by definition, capital goods purchases come under the purview of VAT scheme in Korea.

So, the statement is false.

c)Conditional grants are monetary transfers from one level of government to another, either through competitive project grants or through more general block grants, which place conditions on the use of the transferred funds by the recipient government. An unconditional grant is a grant where the provincial governments could do what they wanted with the money. Since the expenditure is more than the amount of grant, the effect of the conditional and unconditional grant would be the same.

So, the statement is true.

Rahul Sunny answered 1 year ago
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