Paper
Property, Plant and Equiptment * The property, plant and equipment portion of the Consolidated Balance Sheet of Sterling Homex shows a significant increase from 1970 to 1971. The Major contributor to its drastic increase is the “Buildings” account. From 1,702,924.00 it increased to 4,822,055.00, the movement was not explained in the notes though it may be attributed to the expansion of Homex in 1971. This is the time wherein they doubled their manufacturing facilities and created the U.S. Shelter Corporation, a wholly owned subsidiary, to provide construction and permanent financing for its customers.
Deferred Charges * Another account in the Balance Sheet that moved drastically is the Deferred Charges account. From 944,109.00 it grew to 2,558,792.00. A noticeable increase is in the Training and professional development and in the Research and development component. Numbers grew from 148,636.00 and 84,496.00 to 491,641.00 and 671,897.00, respectively.
* In the Balance Sheet of Homex, they capitalized Research and development, as well as the training and professional development. As a general rule, reaserch and development and trainings should be expensed rather than capitalized. The reason behind it is because future economic benefits are uncertain and accountants follow a conservative type of approach. However, if it can be shown that these costs have future alternate uses, then a company may capitalize the cost. In this case, the company would capitalize the cost as an asset and then depreciate or amortize the asset over the expected life. Note that personnel, indirect and contract costs can never be capitalized, regardless of whether a future alternative use exists or not. Therefore, the research and development account is properly classified and recorded but the training and professional development was erroneously classified overstating the assets and net income and understating the expense to be recognized during the time it was incurred.
Deferred Charges * Another account in the Balance Sheet that moved drastically is the Deferred Charges account. From 944,109.00 it grew to 2,558,792.00. A noticeable increase is in the Training and professional development and in the Research and development component. Numbers grew from 148,636.00 and 84,496.00 to 491,641.00 and 671,897.00, respectively.
* In the Balance Sheet of Homex, they capitalized Research and development, as well as the training and professional development. As a general rule, reaserch and development and trainings should be expensed rather than capitalized. The reason behind it is because future economic benefits are uncertain and accountants follow a conservative type of approach. However, if it can be shown that these costs have future alternate uses, then a company may capitalize the cost. In this case, the company would capitalize the cost as an asset and then depreciate or amortize the asset over the expected life. Note that personnel, indirect and contract costs can never be capitalized, regardless of whether a future alternative use exists or not. Therefore, the research and development account is properly classified and recorded but the training and professional development was erroneously classified overstating the assets and net income and understating the expense to be recognized during the time it was incurred.