Question

Hollis incorporated owns an office building adjacent to its factory. in approximately 14 months from now, hollis intends to begin using the building to house its accounting department. hollis prepares a classified balance sheet using an 18-month operating cycle. how would classification of this building be different if hollis used a one-year operating cycle?

Answer 1

Answer:

When Hollis Inc. uses an 18-month operating cycle, it will classify the office building adjacent to its factory as Property Plant and Equipment. This is because it will start using the office for its internal purposes and hence it can be classified as Property, Plant and Equipment.

However, if Hollis were using a one year operating cycle, it will classify the office building as a long-term investment. This is because the company intends to use this office building for internal purposes only after 14 months - which doesn't fall in the current operating period.

It will classify the building as Property Plant and Equipment in the following year, when it begins using the office building.

Answer 2

In the case of the 18-month operating cycle, the building will be recorded as the Property, Plant, and Equipment. In the case of a one-year operating cycle, it will be recorded as an investment.

Further Explanation:

Operating cycle:

The operating cycle refers to the time taken by the business to put the cash into the operating activity of the business and return it into the cash again. The operating cycle is calculated by adding the inventory period and accounts receivable period. The operating cycle includes the purchase of the raw material, processing the raw material into finished goods, and the sale of the finished goods.

Classification of the building in case of a one-year operating cycle:

In the case of the 18-month operating cycle:  

The building should be classified as Property, Plant, and Equipment in the balance sheet of the company. The building will be put into use for the business purpose from the 14th month from now. Therefore, at the end of the operating cycle, the building will be used as an accounting department for the business. Hence, it will be recorded as the Property, Plant, and Equipment.

In case of a one-year operating cycle:

The building should be classified as Long-term investments in the balance sheet of the company. The building will be put into use for the business purpose from the 14th month from now. The building will be considered as an investment at the end of the one-year operating cycle because the building is used for the operating activities from the 14th month, and it was an investment after 12 months (1 year). Hence, it will be recorded as an investment.

Thus, in the case of the 18-month operating cycle, the building will be recorded as the Property, Plant, and Equipment. In the case of a one-year operating cycle, it will be recorded as an investment.

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Answer Details:

Grade: Senior school

Chapter: Operating cycle

Subject: Accounting  

Keywords: Hollis, incorporated, owns, office, building, adjacent, factory, approximately, months, now, intends, begin, using, building, house, accounting, department, classified, balance, sheet, 18-month operating cycle, classification, different, one-year operating cycle.