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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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BuyFindarrow_forward

Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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Case 3-75

Applying the Expense Recognition Principle

Newman Properties Inc. completed construction of a new shopping center in July 2019. During the first 6 months of 2019, Newman spent $550,000 for salaries, preparation of documents, travel, and other similar activities that was directly and incrementally associated with securing tenants (Nordstrom, Best Buy, and Office Depot) for the center. The center will open on August I with all its stores rented on 4-year leases. The rental revenue that Newman expects to receive from the Current tenants $8,500,000 per year for 4 years. The leases will be renegotiated at the end Of the fourth year. The accountant for Newman wonders whether the $550,000 should be expensed in 2019 or whether it should be initially recorded as an asset and matched against revenues over the 4-year lease term.

Required:

Write a short statement indicating why you support expensing the $550,000 in the current period or spreading the expense over the 4-year lease term.

To determine

Concept Introduction:

Accounting is an art of recording, classifying, analyzing and summarizing the financial statement to produce meaningful information and reports.

Accounting is done with two methods as follows:

Cash Basis accounting: Under the cash basis accounting all the cash receipts for the period are considered as revenue and all the cash payments for the period are considered as expenses and net income us calculated.

Accrual Basis accounting: Under the accrual basis, the revenue and expenses are recorded accreting to their accrual for the given period and cash receipts and payments are not considered to decide their accrual. The net income is calculated using the accrued revenue and accrued expenses belonging to the particular period.

To Indicate:

A short statement stating the reason of supporting expensing the $550,000 in the current period or spreading the expense over the 4 year lease term.

Explanation

Under the accrual basis, the revenue and expenses are recorded accreting to their accrual for the given period and cash receipts and payments are not considered to decide their accrual. The net income is calculated using the accrued revenue and accrued expenses belonging to the particular period...

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