Expense Recognition
For each of the following items, indicate whether the expense should be recognized using
(1) direct matching, (2) systematic and rational allocation, or (3) immediate recognition.
Provide support for your answer.
(a) Johnson & Smith, Inc., conducts cancer research. The company’s hope is to develop a cure for the deadly disease. To date, its efforts have proven unsuccessful. It is testing a new Dr.ug, Ebzinene, which has cost $400,000 to develop.
(b) Sears, Roebuck and Co. warranties many of the products it sells. Although the warranty periods range from days to years, Sears can reasonably estimate warranty costs.
(c) Stocks Co. recently signed a 2 year lease agreement on a warehouse. The entire cost of $15,000 was paid in advance.
(d) John Clark assembles chairs for the Stone Furniture Company. The company pays Clark on an hourly basis.
(e) Hardy Co. recently purchased a fleet of new delivery trucks. The trucks are each expected to last for 100,000 miles.
(f) Taylor Manufacturing Inc. regularly advertises in national trade journals. The objective is to acquire name recognition, not to promote a specific product.