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Capitalize vs. Expense

Capitalize vs. Expense

On September 1, 2003, The Financial Times reported that China Unicom, a leading Chinese telecom company, had capitalized to its balance sheet the cost of customer handset subsidies (the difference between the cost of the handset and the price charged to retain customers). Observers suggested that the subsidies should have been charged against income at the time the customer purchased the handset rather than capitalized to the company's balance sheet.

Required:

If China Unicom switched from capitalizing and amortizing handset subsidies to immediately expensing them (for reporting to shareholders only), indicate how the following financial statement items would be affected:

1: Operating expenses
2: Assets
3: Cash flow from operations
4: Liabilities
5: Operating revenue

Solution Preview

1: Operating expenses - The operating expense would increase. Currently some costs are not expensed but capitalized; this implies that the costs have been taken into the balance sheet and not the income statement. If the costs are immediately expensed, then all costs will be in the income statement and so the operating expenses would increase

2: Assets - The assets would decrease. The costs which ...

Solution Summary

The solution explains the impact of expensing costs instead of capitalizing them.

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