MGT401 Financial Accounting II GDB 1 Solution Fall 2014


K&S (Pvt) Ltd. has recently established its business of readymade garments in Lahore. Mr. Aslam – owner of the company has tried to launch state of the art processes at every step from product design to manufacturing. K&S (Pvt) Ltd. needed funds aggregating to Rs. 2 Million, half of the amount was invested by owner and remaining requirement was fulfilled by obtaining debt from bank. During the financial year 2014-15, K&S (Pvt) Ltd. incurred the costs on:

a)      Preoperative expenses

b)      Promotional activities

c)      Designs and testing of prototypes

d)     legal fee to acquire the copyrights

e)      employee’s training

Required: Which of the above mentioned costs are eligible for capitalization as an intangible asset ? Justify your answer by giving valid points.

a)     Preoperative expenses

Preoperative expense is expense incurred before starting operation of business i.e. Commercial operation all expense whether it is salary , fee of engineer , all expense which is necessary to start the operation needs to be capitalized under plant or building or machinery etc. Preliminary & preoperative are different. Preliminary is before incorporation of business while preoperative is after.

b)      Promotional activities


Promotion refers to raising customer awareness of a product or brand, generating sales, and creating brand loyalty. Promotion is also found in the specification of five promotional mix or promotional plan. These elements are personal selling, advertising, sales promotion, direct marketing, and publicity.

c)      Designs and testing of prototypes

In contrast with research costs development costs are incurred at a later stage in a project, and the probability of success should be more apparent.

d)     Legal fee to acquire the copyrights

Copyrights grant a business sole authority to reproduce and sale a software, book, magazine, journal, etc.

e)      Employee’s training

Educational preparation for performing a job that is typically provided to staff by the business that has recently hired them before they become active in service to the company. Employee training is increasingly required to assist the work force in using modern techniques, tools, strategies and materials in their jobs.