Question

You have been recently employed as the assistant controller for Foster Fridges and Appliances Ltd., a large privately-owned retail store that is family owned. The company has been profitable for the last ten years, reporting an average 15% net profit margin. They have no significant debt. The owners are wealthy as a result of salary and dividends paid from the company. During the past year, the company purchased a building in a better location. The company plans to be in the building for some time and so had significant improvements made before moving in. The walls were ripped down, new partitions were put in, it was painted and had new carpet installed and the reception and office areas were updated. Management believes they will be in the building for 20 to 25 years before they move again or any major structural renovations are needed. The improvements they recently made could last 10 years at the most, but more likely 7 years. Foster has an agreement with Good Life (GL), the appliance company from which they purchase their entire inventory. In this agreement, Foster must pay GL 10% of pre tax income each year for the right of exclusive distribution of the GL product line. In preparation for the year end audit, the controller has asked you to insure that all of the costs of the building improvements were expensed to an account called “Repairs and Maintenance” since the building needed to be fixed up before it could be useable. Costs of the building, the expenses incurred before occupancy, and the company’s sales and projected net income (after amortization of the building over seven years and expensing the expenses related to the building) are below. Sales $45,000,000 Cost of building $ 7,700,000 Expenses incurred $ 5,000,000 Projected net income $10,000,000

Required

As the Assistant controller, you are required to provide a report concerning all issues based on your revised income statement. This must consider the appropriate renovation and development expenses according to ASPE or IFRS.

Answer 1