Use the information below to answer the following questions:
Plant Hire Ltd has been in business for one year. The company makes it a practice to capitalise a portion of its advertising costs as a ‘deferred asset’ and to amortise them at 25% per annum. The accountant has suggested to the general manager that the policy of capitalising advertising should be ended because the economic benefit of the expenditures is not clearly determinable. The amount of advertising capitalised this year was $100 000.
-What effect would such a policy change have on net profit before tax?

Question

Use the information below to answer the following questions:
Plant Hire Ltd has been in business for one year. The company makes it a practice to capitalise a portion of its advertising costs as a ‘deferred asset’ and to amortise them at 25% per annum. The accountant has suggested to the general manager that the policy of capitalising advertising should be ended because the economic benefit of the expenditures is not clearly determinable. The amount of advertising capitalised this year was $100 000. 
-What effect would such a policy change have on net profit before tax?

Quizplus · Accepted Answer

If the company stops capitalizing advertising costs, the entire $100,000 would be expensed immediately, rather than amortizing $25,000. This results in a $75,000 reduction in net profit before tax ($100,000 - $25,000).

Use the Information Below to Answer the Following Questions