Question

Tyler Corporation started its operations in March. During the first year of operation, a significant amount of money was spent on attorneys’ fees and promotional expenses connected with organizing the corporation. The amount of revenue Tyler Corporation earned for the year was much higher than expected. Because of this, the accountant decided to charge the attorneys’ fees and promotional expenses to advertising expense in the current year.

1. If the accountant simply was not aware of the proper treatment of these expenditures, were any ethical principles violated? Why or why not?

2. How would you have treated these expenditures?

Answer 1

a) A significant amount of money was spent on attorneys’ fees and promotional expenses connected with organizing the corporation.This expenses were incurred to set up a corporation and hence is a capital expenditure. Earning high revenue dores change change the natutre of expenditure to revenuw expenditure (advertisment expenses). Thus, the accouting treatment is incorrect. b) These expenses should be capitalised and should be amortised on the estimated life of the corporation