You are the accountant for a division of a company that is constructing a buildi

Question

You are the accountant for a division of a company that is constructing a building for its own use. It is January 2011, and you are working on closing the books for 2010. The CEO of the division stops by your office and says, “I have some question about our building. Although we started the construction at the beginning of June this year, we started planning it at the beginning of the previous year. I believe that we can capitalize interest since then. Check to see if we did capitalize some in 2009. If not, we can take it out of this year’s expense and get a double dose. Also, I want you to add lots of overhead to the cost of the building so we can increase our profit for this year. For example, you spent quite a bit of time on the project. So perhaps we could add 1/12 of your salary to the cost of the building. You get the idea?” When the CEO leaves you check the files and find a letter to an architect dated January 2, 2009. There are numerous subsequent letters to and from the architect.
From financial reporting and ethical perspectives, how would you reply to the CEO? Include a discussion of the reasoning you used to support your stand on the ethical issues.

Explanation / Answer

      As per accounting standards we have to record currant year revenues & expenses in income statement. Ex: If we paid interest of $100, for this month $50 and for next month $50, in this case we have to show in Income statement only $50 as expenditure another $50 transfer to assets side of balance sheet as prepaid interest.       Capital expenditure means any expenditure increases the efficiency of the asset or life time of the asset, we have to treat these expenses as capital expenses and add to value of the asset. Other than these expenses we can't add to asset. We have to treate other over heads also. If we explain like this CEO can understand. Thank you....

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