Topic > Accounting - 1607

According to generally accepted accounting principles, T-Shirts by Tommy may account for the incident or record an extraordinary event. Using the definition from our Intermediate Accounting textbook, extraordinary events are defined as “…events and transactions that are distinguished by their unusual nature and the rarity of their occurrence” (Keiso). Due to the nature of the plane crash and the fact that these types of accidents happen very rarely, it can definitely be classified as extraordinary. Tommy must estimate how much to spend for the loss of the building and other losses associated with the accident. Then it must record this item on its annual income statement. If Tommy's business isn't planning on operating another location soon, the smart thing to do would be to end the lease so they no longer have to pay for the equipment. Tommy, however, has a location he will be able to operate from shortly, so he should consider not recording equipment rental expenses during downtime and spreading it evenly over the rest of the year. It would not make sense to maintain the same lease expense during which the equipment is not generating revenue; doing so would violate the correspondence principle. The best way to do this is to allocate equipment depreciation to later periods in which the equipment will be operational. For example, if we had an expense of $1000 each month for equipment depreciation, for the 3 months and 2 weeks that the machines will be idle, we would adjust the $3500 to the remaining time of our rental. If there were 10 months of lease left after that, we could add $350 to each of the remaining months. The situation Tommy finds himself in is unfortunate, but the effects could have been reduced if he had taken some precautions, such as if an unexpected event occurred. The first precaution Tommy could have taken was to produce T-shirts year-round, not just ramp up production before spring break. If he had many more t-shirts in stock for spring break, the week that he is unable to produce t-shirts due to the accident would not affect his business as much financially because he will still have many t-shirts to sell. Waiting until