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Would it be preferable to amortize or expense?

(Expense Recognition Principle) Daniel Barenboim sells and erects shell houses, that is, frame
structures that are completely finished on the outside but are unfinished on the inside except for flooring,
partition studding, and ceiling joists. Shell houses are sold chiefly to customers who are handy with
tools and who have time to do the interior wiring, plumbing, wall completion and finishing, and other
work necessary to make the shell houses livable dwellings.
Barenboim buys shell houses from a manufacturer in unassembled packages consisting of all lumber,
roofing, doors, windows, and similar materials necessary to complete a shell house. Upon commencing
operations in a new area, Barenboim buys or leases land as a site for its local warehouse, field office,
and display houses. Sample display houses are erected at a total cost of $30,000 to $44,000 including the
cost of the unassembled packages. The chief element of cost of the display houses is the unassembled
packages, inasmuch as erection is a short, low-cost operation. Old sample models are torn down or altered
into new models every 3 to 7 years. Sample display houses have little salvage value because dismantling
and moving costs amount to nearly as much as the cost of an unassembled package.
Instructions
(a) A choice must be made between (1) expensing the costs of sample display houses in the periods
in which the expenditure is made and (2) spreading the costs over more than one period. Discuss
the advantages of each method.
(b) Would it be preferable to amortize the cost of display houses on the basis of (1) the passage of
time or (2) the number of shell houses sold? Explain.

Solution Preview

a) A choice must be made between (1) expensing the costs of sample display houses in the periods
in which the expenditure is made and (2) spreading the costs over more than one period. Discuss
the advantages of each method.

Advantages of expensing: Expensing the samples means that your assets are never bloated by a sample that may not have any ...

Solution Summary

Discussion is in everyday language suitable for a novice (241 words). The comments give the student a chance to agree or disagree and thus make their own unique response.

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