In lieu of treating interest during construction as

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In lieu of treating interest during construction as an element of the cost of the physical assets, it can be argued that it represents an element of the general cost of bringing the business to the point of revenue production and should therefore be treated as an organization expense. This view regards interest during construction as just another of the many expenditures that are necessary to acquire and organize the physical assets of a new business but do not attach to any specific assets. Note that interest must be capitalized in this situation (see chapter 10) because the building requires a period of time to get it ready for its intended use. The amount of interest cost for the first nine months of 2014 is the measure of the 2014 loss resulting from the tornado. The extension of the construction period to October 2014 because of the tornado does not warrant its capitalization as construction period interest. It is in effect an uninsured loss resulting from the tornado. Had it not been for the tornado, the entire amount would have been a normal operating expense chargeable against the rental revenue that would have been earned during the first nine months of 2014. Cost of obtaining tenants. Both the 2013 and 2014 costs of obtaining tenants should be expensed as incurred. The cost of obtaining tenants is a start-up cost. The accounting for start-up costs is straightforward—expense these costs as incurred. The profession recognizes that these costs are incurred with the expectation that future revenues will occur or increased efficiencies will result. However, to determine the amount and timing of future benefits is so difficult that a conservative approach—expense these costs as incurred—is required. Promotional advertising. The profession has concluded that, except in limited situations, future benefits from advertising are not sufficiently defined or measurable with a degree of reliability that is required to recognize these costs as an asset. As a result, the costs should be expensed as incurred or the first time the advertising takes place. The advertising costs incurred in 2014 might be reported as a loss to indicate that an unusual event caused this additional expense. CA 12-2 (a) A dollar to be received in the future is worth less than a dollar received today because of an interest or discount factor—often referred to as the time value of money. The discounted value of the expected royalty receipts can be thought of either in terms of the present value of an annuity of 1 or in terms of the sum of several present values of 1. (b) If the royalty receipts are expected to occur at regular intervals and the amounts are to be fairly constant, their discounted value can be calculated by multiplying the value of one such receipt 12-41
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by the present value of an annuity of 1 for the number of periods the receipts are expected. On the other hand, if receipts are expected to be irregular in amount or if they are to occur at irregular CA 12-2 (Continued)
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Christopher Reinemann
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