(Accounting for Pre-Opening Costs) After securing lease commitments from several major stores, Auer Shopping Center, Inc. was organized and built a shopping center in a growing suburb.
The shopping center would have opened on schedule on January 1, 2017, if it had not been struck by a severe tornado in December. Instead, it opened for business on October 1, 2017. All of the additional construction costs that were incurred as a result of the tornado were covered by insurance.
In July 2016, in anticipation of the scheduled January opening, a permanent staff had been hired to promote the shopping center, obtain tenants for the uncommitted space, and manage the property.
A summary of some of the costs incurred in 2016 and the first nine months of 2017 follows.
| 2016 | January 1, 2017, through September 30, 2017 |
Interest on mortgage bonds | \(720,000 | \)540,000 |
Cost of obtaining tenants | 300,000 | 360,000 |
Promotional advertising | 540,000 | 557,000 |
| | |
The promotional advertising campaign was designed to familiarize shoppers with the center. Had it been known in time that the center would not open until October 2017, the 2016 expenditure for promotional advertising would not have been made. The advertising had to be repeated in 2017.
All of the tenants who had leased space in the shopping center at the time of the tornado accepted the October occupancy date on the condition that the monthly rental charges for the first 9 months of 2017 be canceled.
Instructions
Explain how each of the costs for 2016 and the first 9 months of 2017 should be treated in the accounts of the shopping center corporation. Give the reasons for each treatment.
