Question

Recently, a group of university students decided to incorporate for the purposes of selling a process to recycle the waste product from manufacturing cheese. Some of the initial costs involved were legal fees and office expenses incurred in starting the business, state incorporation fees, and stamp taxes. One student wishes to charge these costs against revenue in the current period. Another wishes to defer these costs and amortize them in the future. Which student is correct?

Short answer

The student who wishes to charge these costs against revenue in the current period is correct.

Step-by-step solution

Meaning of Initial Cost

The money necessary for the capital construction or refurbishment of a big facility is referred to as the initial cost.

Reason

These expenses are referred to as start-up costs or, in this case, organizational expenditures. Start-up expenditures are simple to account for: expend them when they are incurred. The profession understands that these expenses are made with the prospect of improved revenues or efficiency in the future. However, determining the amount and timing of future gains is so challenging that a conservative approach is required—expending these expenditures as they are spent.