Public Company Ltd. is a large, publicly held company whose shares are actively traded on the Toronto Stock Exchange and that has earnings before tax of $300 million per year. The company has spent $15 million in the current year to improve the basic literacy skills of its employees (i.e., reading, writing, and arithmetic) to allow the introduction of high-tech, computerized, automated equipment. Without this training, efficient and effective implementation of the new production process is unlikely to occur. Management of Public Company proposes that the entire amount be capitalized and amortized over the next 15 years (the estimated average remaining working life of the trained workers).
Required:
In answering this question, ignore specific accounting standards and refer to basic accounting principles and concepts to justify your positions.
a. Provide three arguments in support of expensing the $15 million in the year incurred.
b. Provide three arguments in support of capitalizing the $15 million.
c. Assuming these costs were capitalized, do you agree with the 15-year amortization period? Explain your conclusion.