Logistics Distribution Center receives a number of different products in its warehouse. Logistics distributes these products by truck to customers within a radius of 150 miles. The company is located near the Jackson Regional Airport, which is owned and operated by the city of Jackson. Most of the products are received by rail or truck, but some are received by air.
The city and the local Chamber of Commerce have announced a joint undertaking to build a new divided highway to connect the airport with the interstate highway approximately three miles away. The Chamber of Commerce is attempting to raise $4,000,000 as its contribution to the new highway's cost. The Chamber has asked the 10 largest enterprises in the city to make substantial contributions. Logistics has been asked to contribute $1,000,000 of the total amount.
At a meeting of Logistics' board of directors, the request was considered. It was pointed out that although Logistics is not located on the route of the proposed new road, the road's construction would speed up access of trucks to the warehouse and should substantially increase the value of Logistics' property. It is difficult to measure the benefits of either of these factors. The company's president suggested that a major reason for making the contribution was to get good publicity and to improve the company's image in the community. "It is good advertising," he said.
The company's controller is asked how the contribution would be accounted for in the company's accounts. A major question is whether the $1,000,000 should be:
■ Charged to expense when the contribution is made (thus reducing income of that period),
■ Capitalized as part of the cost of the land owned by the company in the area (increasing assets and not affecting income),
■ Recorded as an asset and charged to expense over a period of 10 years (thus increasing assets in the short run and spreading out the effects of the contribution on income).
What answer would you give if you were the controller? In your answer, consider the principles, assumptions, and concepts that you have studied in this chapter.