You enjoyed your job in the real estate accounting department of Forever Twelve, Inc., a large publicly traded retail clothing chain, until recently.
Last month, your company signed a 10-year nonrenewable lease with a major regional shopping mall. As part of the deal, Forever Twelve, Inc. agreed to invest $500,000 to immediately upgrade the interior of the store. This upgrade will include installing LED lighting, marble floors with gold inlays, bathrooms, and dressing rooms. In return, the mall's landlord agreed to give your company an "incentive payment" equal to 40% of the value of the upgrades, payable immediately.
According to construction industry estimates, these upgrades have an average useful life of 15 years. You remember from your business law course that these items are classified as "fixtures" and must remain affixed to the property when a tenant vacates the premises.
The head of the Real Estate Accounting Department has told you to record the 40% incentive payment as an immediate $200,000 revenue. Then, you are supposed to "depreciate the net out-of pocket cost" of $300,000 on a straight-line basis over 15 years.
You have no background at all in real estate accounting, so you asked your boss two questions: "Isn't the $200,000 a cost rebate rather than income?," and "Are you sure that 15 years is the correct depreciation period?" In response, your boss told you, "Look, this company is aggressive in its accounting and aggressive in firing people. Just do it."
You did a little research, but could not definitively find the answers to your questions.
a. Do you doubt the accuracy of the accounting policy posed by your boss? Why?
b. Under the AICPA Code, what principles would you violate if you follow the accounting directive of your boss?