Morty Enterprises, is a new start-up company. Morty Enterprises has been prepari

Question

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!

Explanation / Answer

ASC 720 deals with other expenses with eight sub topics within it. Sec. 195 defines startup costs as costs incurred to investigate the potential of creating or acquiring an active business and to create an active business. To qualify as startup costs, the costs must be ones that could be deducted as business expenses if incurred by an existing active business and must be incurred before the active business begins.
A taxpayer that elects to deduct and amortize startup costs may deduct up to $5,000 of startup costs in the year the active conduct of the business begins.
Accounting treatment of monty enterprises is appropiate and can deduct over further period of not more than 15 years.

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