Morty Enterprises is a new startup company Morty Enterprises

Morty Enterprises, is a new start-up company. Morty Enterprises has been preparing to begin operations for the past six months and is almost ready to start production. It has incurred significant costs but no revenue has yet to be earned. Organization costs such as legal fees and advertising have been capitalized as start-up costs. Morty Enterprises has expensed all payroll expenses, rent, and other similar costs as incurred—this has resulted in a significant loss being reported on the first year’s financial statements. Is Morty’s accounting treatment in accordance with GAAP?

You may use accounting sources other than the Accounting Standards Codification (ASC), but you must find the appropriate section of the ASC that describes the accounting for the issue.

Write a report describing the proper accounting treatment for the transaction or event described in the case. Thank you!

Solution

Alike expenses of legal fees and advertizing expenses, payroll exp, rent, and other similar costs would also be capitalized in the books. Depreciation will be also charged as per accounting policy of the company. All such revenue expenditures are not shown in P & L a/c. After installation and commissioning of the plant, revenue expenses will be shown in P&L a/c. Preliminary expenses are written off in the forthcoming years as per accounting policu of the company. Thus,These expenses are to be capitalised with other costs related to the application and allowed as deduction by way of deprecation over the life period of the application. Thus, Morty;s accounting treatment is not as per GAAP.

T he conclusion seems simple enough: The costs of start-up activities, including organization costs, should be expensed as they are incurred. But how easy will entities find it to apply this new rule by the AICPAs AcSEC? In April 1998, AcSEC issued SOP 98-5, Reporting on the Costs of Start-Up Activities , which applies to all nongovernment entities. Most entities are required to adopt the SOP for fiscal years beginning after December 15, 1998, except for certain investment companies, which were required to adopt it as of June 30, 1998.

For accounting of Star-up expenses ASC -720-15 is applicable . Which describes how such expenditure are reflected in annual accounts.