At the beginning of the current report on was originally accounted for as part of on new signage for all its premises. The expenditure on signage property, plant, and equipment. It was recognized as a depreciable asset with a useful life of 10 years. Tony has been engaged as the new accountant for City Retail Lid. Tony believes that the expenditure for signage should be recognized as an expense because it is in the nature of advertising and the signage has no resale value. Eager to impress the senior managers, Tony gave a presentation om presentation on how he would 'improve the forthcoming annual financial statements, by expensing signage costs. An extract from his presentation is provided below.

Tony was puzzled by the senior managers' response: 'You don't understand our business. What might look like an improvement for your financial statements, looks like devastating economic consequences for us." Additional informatio

• Managers receive a bonus, subject to profit exceeding 10% of total assets. 

• The long-term debt agreement restricts borrowing to a maximum of 65% of total assets Required simplicity assumes that the change in accounting treatment has no implications on tax or tax expense. 

1. Describe and quantify the effects of recognising e and quantify the effects of recognizing the signage costs as an expense in City Retail Ltd's financial statements for the year ended 30 June 

2. How would agency theory explain why the managers of City Retail Lid did not welcome Tony's accounting treatment for the expenditure on signage?

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is provided below. Before change $'000 % of total assets 100 60 4200 Total assets (nckudes signage with carrying amount of $450 000) Total liabilties (ncludes a long-term debt agreement) Shareholders' equity Profit (includes depreciation expense of $50000) 2 500 1700 40 600 14 is provided below. Before change $'000 % of total assets 100 60 4200 Total assets (nckudes signage with carrying amount of $450 000) Total liabilties (ncludes a long-term debt agreement) Shareholders' equity Profit (includes depreciation expense of $50000) 2 500 1700 40 600 14

Answer rating: 100% (QA)

1 First of all profits will fall The impact will be 600000 50000 depreciation will be added back 500... View the full answer