If Tommy's business was not going to be operating soon at another location the smart thing to do would be to end the lease so that they would no longer have to pay for the equipment. Tommy, however, has a location where he can be operating shortly so he should consider not recording lease expense on the equipment during its downtime, and distributing it to the rest of the year evenly. It would not make sense to maintain the same lease expense during which time the equipment is not generating revenue; doing so would violate the matching principle. The best way to do this is to allocate the depreciation for the equipment to later periods when the equipment will be up and running. For instance, if we had a $1000 expense each month for equipment depreciation, for the 3 months and 2 weeks the machines will be down, we would readjust the $3500 to the remaining time of our lease. If there were 10 months on the lease after that time, we could add $350 to each of the remaining months.
The situation that Tommy finds himself in is unfortunate, but yet the effects could have been reduced if he had taken a few precautions, in case of an unexpected event, occurred. The first precaution that Tommy could have taken was to produce T-shirts the whole year, not to just increase... [continues]
Cite This Essay
(2007, 12). According to the Generally Accepted Accounting Principles. StudyMode.com. Retrieved 12, 2007, from http://www.studymode.com/essays/According-Generally-Accepted-Accounting-Principles-127501.html
"According to the Generally Accepted Accounting Principles" StudyMode.com. 12 2007. 12 2007 <http://www.studymode.com/essays/According-Generally-Accepted-Accounting-Principles-127501.html>.
"According to the Generally Accepted Accounting Principles." StudyMode.com. 12, 2007. Accessed 12, 2007. http://www.studymode.com/essays/According-Generally-Accepted-Accounting-Principles-127501.html.