(a) A property lease includes a requirement that the premises are to be repainted every five years and the future cost is estimated at $100,000. The lessee prefers to spread the cost over the five years by charging $$20,000 against profits each year. Thereby creating a provision of $100,000 in five years' time and affecting profits equally each year. Requirement: Was it correct for the lessee to provide for this cost? Explain your decision (b) A retail store has a policy of refunding purchases by dissatisfied customers, even though it is under no legal obligation. Its policy of making refunds is generally known. Requirements: Should a provision be made at year end
(a) A property lease includes a requirement that the premises are to be repainted every five years and the future cost is estimated at $100,000. The lessee prefers to spread the cost over the five years by charging $$20,000 against profits each year. Thereby creating a provision of $100,000 in five years' time and affecting profits equally each year. Requirement: Was it correct for the lessee to provide for this cost? Explain your decision (b) A retail store has a policy of refunding purchases by dissatisfied customers, even though it is under no legal obligation. Its policy of making refunds is generally known. Requirements: Should a provision be made at year end
Chapter18: Accounting Periods And Methods
Section: Chapter Questions
Problem 16DQ
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Transcribed Image Text:(a) A property lease includes a requirement that the premises are to be repainted
every five years and the future cost is estimated at $100,000. The lessee prefers to
spread the cost over the five years by charging $$20,000 against profits each year.
Thereby creating a provision of $100,000 in five years' time and affecting profits
equally each year.
Requirement:
Was it correct for the lessee to provide for this cost? Explain your decision
(b) A retail store has a policy of refunding purchases by dissatisfied customers, even
though it is under no legal obligation. Its policy of making refunds is generally
known.
Requirements:
Should a provision be made at year end
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