You are the CFO of Thunderduck Energy, Inc, a public company that specializes in

Question

You are the CFO of Thunderduck Energy, Inc, a public company that specializes in the exploration and development of natural gas. It's near year-end, and you have been in several meetings with management to discuss the end of year net income projections. The company’s employees receive a bonus if the company’s net income in the current year exceeds the net income from the past year. For the current year, the earnings have not been as strong as expected and net income may fall short of last year’s income. The President has an idea to ensure that net income will increase this year so that the employees will earn their bonus and the shareholders will be happy. The President wants to discuss routine maintenance costs on equipment that were incurred this year. These costs were treated as an expense on the income statement. However, the President is proposing that these costs can be capitalized and should be accounted for as a long-term asset on the balance sheet in order to boost the company’s net income.

Required:

Draft a one-page response in the form of a business memo to your manager discussing your recommendation on the President’s suggestion to capitalize the maintenance costs and record the costs as a long-term asset. Support your decision with addressing the accounting issue, the parties affected and what factors you considered to make your decision. Your memo will be graded based on the written communication, critical thinking and ethics rubrics.

Explanation / Answer

It will be useful to capitalize on the maintenance costs. This is a beneficial method for taking advantage of the costs that are connected with getting the asset ready for use. In this case it is the important maintenance costs.

It is recommended to conduct evaluation to figure out the important costs that are appropriate for capitalising. It will be effective to prevent depreciation when capitalised costs are used to convert it to a life long asset. It is suggested to set fixed asset threshold.

It is recommended to create a capitalization policy and ensure a proper balance established between the assets and the expenses.

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