C6-9 Ethics and Quarterly Expenses
It is March 2011, and you have just been hired by the Tallas Company to be its accountant. Tallas is a small corporation that does a seasonal business of selling snow removal equipment, with most of its sales to retailers occurring in the last two quarters of the calendar year. Production is particularly heavy during the second quarter, in preparation for these sales. During the first quarter, production is slowest, so this is when Tallas does the majority of its repairs and maintenance on its production equipment.
You are in the process of preparing Tallas Company’s 2011 first quarter interim report. After preparing a preliminary income statement, which shows a modest $30,000 profit, you begin to prepare a preliminary balance sheet. In reviewing the asset accounts in the general ledger, you notice an account entitled Miscellaneous Factory Assets in the amount of $140,000. Since this is a large amount relative to the other assets and you are unclear how to classify this asset, you ask the controller for an explanation. The controller replies, “Oh that. Just include it under Property, Plant, and Equipment. That is the amount we spent on repairs and maintenance during the first quarter. If we expensed all of it now, we would show a loss for the first quarter. Instead, we record the amount as an asset, wait to see how the second quarter results are, and then expense some of it so we can show a reasonable profit. The remainder we expense during our busy season of the third and fourth quarters. We have been doing this for years. It makes all of our quarterly income statements look better. Besides, it makes no difference, since our total yearly income is the same regardless of when we report repairs and maintenance expense during the four quarters.”Required:From financial reporting and ethical perspectives, when do you think Tallas Company should report its quarterly repairs and maintenance expense?