The Board of Directors for Richmond Ltd has questioned the accounting treatment recommended by their accountant, Taylor, for $600,000 spent on signage and labeling during the year ended 30 June 20X2. The Board was expecting the amount to be recognized as an asset, that could be depreciated
over a useful life of 10 years, and were disappointed with Taylor’s decision to recognize it as an expense.
Additional information
• If the $600,000 had been recognized as an asset, the entity would have also recognized depreciation expense for the year of $30,000.
• $600,000 is material to the entity for the year ended 30 June 20X2.
• Executive directors receive an annual bonus when profit exceeds 10% of total assets.
• The long-term debt agreement restricts borrowing to a maximum of 65% of total assets.
Required:
1. Explain the general process of recognizing Assets and Expenses in an entity’s financial statements in accordance with the Conceptual Framework.
2. Write the total journal entry to recognize the $600,000 expenditure (assuming it was paid on 31 December 20X1) and explain why Taylor decided to recognize it as an expense rather than an asset.
3. Explain why the Board would have preferred to recognise the $600,000 as an asset rather than an expense.
Note, your answers must be clear and persuasive, and demonstrate your understanding of the issues. References from the Conceptual Framework must be used to support your answers. The position taken in each answer must be clearly identified and supported with appropriate evidence, including references were necessary.