Companies normally have a capitalization threshold, meaning that if something that would meet the definition of a
Question:
Companies normally have a capitalization threshold, meaning that if something that would meet the definition of a capital asset falls below a certain dollar amount, it is expensed instead. For example, if you buy a trash can for an office that costs $29, it would be immediately expensed even though it will be used longer than a year. This amount is not material to anyone making decisions about the company. A typical amount for this threshold for companies might be $500 or $1,000.
You are the accountant for AAA Wholesale, a company that has $2,000,000 in assets. The company has had a policy of expensing anything under $1,000 for several years and you have always followed that policy. In fact this year, you have already expensed 8 items that cost the company between $800 and $999. A new printer has just been purchased for $875 and you recorded it as an office expense as you normally would.
The company is seeking a large loan from a local bank due to a downturn in the economy that has put pressure on the company's ability to pay its bills. The CEO stops by your office after seeing the latest monthly income statement that includes the expense of the new printer. He reminds you that the bank will be reviewing the most recent financial statements and that the income for the month would look much better if the cost of the printer were put on the balance sheet. "Since this is just an arbitrary threshold for capitalizing or expensing something, what's the big deal of changing the accounting this time? If the company doesn't get the loan, cuts will have to be made and nobody wants people to lose their jobs, right?"
How would you respond to the CEO in this case? What should be considered as you decide on your response?
Fundamentals of corporate finance
ISBN: 978-0470876442
2nd Edition
Authors: Robert Parrino, David S. Kidwell, Thomas W. Bates