Textbook Problem

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.