Jane’s Air Conditioning Service decided that this year was the year to “take ove

Question

Jane’s Air Conditioning Service decided that this year was the year to “take over” the air conditioning business in her town. Beginning in January, she started advertising her business (even though there was snow on the ground), bought a supply of Freon, updated her vehicles and bought new uniforms for her service technicians who were making house calls.
Jane comes to you to determine how to optimize her deductions in order to reduce her tax liability. What advice would you give her as to the expenditures above (assuming they all took place in the same year)? Be sure to also explain what may (or may not) be capitalized and/or deducted.

Explanation / Answer

(i) Expenses related to advertisements are usually treated as expenses and recored in an organization's profit and loss account. The journal entry will be:

Advertising expenses (Dr)

Cash (Cr)

Advertising expenses can be recored as an asset by Jane's air conditioning service, if and only if, there is a reliable information between total costs and future benefits that will result from advertising. In such cases, advertising costs are accrued and then charged as expenses when related revenue is recognized. In case, Jane's air conditioning service is able to establish a reliable information between total costs and future benefits she can accrue the costs. Otherwise, the entire amount will have to be recognized as expenses in the current year's profit and loss statement.

(ii) Freon: It is the trade name of CFC. It is added to the compressor of the AC unit. Now, the Freon that was purchased by Jane's air conditioning service will be treated as current assets. They will be booked as inventory. Accounting entry will be:

Freon (Inventory) (Dr)

Cash (Cr)

When actual servcing is done, the freon will be charged to the customer's account as per the usage.

(iii) Update of vehicles: Update of vehicles will bring Jane benefits in future periods as the vehicles will be used to support the business in future. Thus it can be capitalized on the account of being able to generate future benefits.

(iv) New uniforms: If the uniforms have logo of Jane’s Air Conditioning Service, it will be deductible as expenses from this year's profit and loss statement.

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