ASC 915: Pre-Opening Costs Journal Entries

Posted In | ASC Education | Gridlex Academy

Development stage entities are companies in their early stages of operations that have not yet generated significant revenues or begun planned principal operations. These entities face unique accounting challenges, particularly in relation to the capitalization of pre-opening costs. The Accounting Standards Codification (ASC) 915, specifically addresses the accounting and reporting practices for development stage entities. In this article, we will explore ASC 915, focusing on the capitalization of pre-opening costs, and explain how to record these transactions using journal entries.

Overview of ASC 915

ASC 915 is a part of the Accounting Standards Codification issued by the Financial Accounting Standards Board (FASB) in the United States. This standard provides guidance on the recognition, measurement, presentation, and disclosure requirements for development stage entities. It outlines the specific accounting treatment for costs incurred during the development stage, including the capitalization of certain pre-opening costs.

Pre-opening Costs

Pre-opening costs are expenses incurred by a development stage entity before it commences its planned principal operations. These costs may include:

Organizational costs: Costs associated with the formation of the entity, such as legal and accounting fees, incorporation costs, and other start-up expenses.
Start-up costs: Costs incurred to establish the entity's business operations, such as rent, employee training, and initial advertising expenses.

Capitalization of Pre-Opening Costs

ASC 915 allows for the capitalization of certain pre-opening costs, which are then amortized over a specified period once the entity commences its principal operations. The costs eligible for capitalization include:

Organizational costs directly attributable to the formation of the entity.
Start-up costs that are directly attributable to the establishment of the entity's business operations, and can be clearly associated with a future economic benefit.

Journal Entries for Capitalization of Pre-Opening Costs

To illustrate the application of ASC 915, let's consider a hypothetical example of a development stage entity that incurs $50,000 in organizational costs and $30,000 in start-up costs.

1. Recording the organizational costs:

Debit: Organizational Costs (Asset) - $50,000

Credit: Cash - $50,000

This journal entry records the organizational costs as an asset and the corresponding decrease in cash.

2. Recording the start-up costs:

Debit: Start-up Costs (Asset) - $30,000

Credit: Cash - $30,000

This journal entry records the start-up costs as an asset and the corresponding decrease in cash.

3. Amortization of capitalized pre-opening costs:

Once the development stage entity commences its principal operations, the capitalized costs should be amortized over a specified period, typically using the straight-line method.

Assuming the entity chooses to amortize the costs over a 5-year period, the annual amortization expense would be:

Organizational Costs: $50,000 / 5 years = $10,000 per year

Start-up Costs: $30,000 / 5 years = $6,000 per year

The journal entry to record the annual amortization expense is:

Debit: Amortization Expense - $16,000

Credit: Accumulated Amortization (Organizational Costs) - $10,000

Credit: Accumulated Amortization (Start-up Costs) - $6,000

This journal entry records the annual amortization expense and the corresponding increase in accumulated amortization for both organizational and start-up costs.

ASC 915 provides essential guidance for development stage entities on the capitalization of pre-opening costs. By understanding and applying the provisions of this standard, these entities can ensure accurate financial reporting and transparency for stakeholders. Recording the transactions using journal entries allows development stage entities to track and report their pre-opening costs systematically, ensuring compliance with accounting requirements.