Assignment:
After securing lease commitments from several major stores, Lobo shopping center, Inc. was organized and built a shopping center in a growing suburb.
The shopping center would have opened on schedule on January 1, 2007, if it had not been struck by a severe tornado in December. Instead, it opened for business on October 1, 2007. All of the additional construction costs that were incurred as a result of the tornado were covered by insurance.
In July 2006, in anticipation of the scheduled January opening, a permanent staff had been hired to promote the shopping center, obtain tenants for the uncommitted space, and manage the property.
A summary of some of the costs incurred in 2006 and the first nine months of 2007 follows.
Jan 1, 2007-
2006 Sept 30, 2007
Interest on Mortgage Bonds $720,000 $540,000
Costs of Obtaining Tenants $300,000 $360,000
Promotional Advertising $540,000 $557,000
The promotional advertising campaign was designed to familiar shoppers with the center. Had it been known in time that the center would not be open until October 27, 2007, the 2006 expenditure for promotional advertising would not have been made. The advertising had to be repeated in 2007. All of the tenants who had leased space in the shopping center at the time of the tornado accepted the October occupancy date on the condition that the monthly rental charges for the first 9 months of 2007 be canceled.
Instructions:
Explain how each of the cost for 2006 and the first 9 months of 2007 should be treated in the accounts of the shopping center corporation. Give the reason for each treatment.