Prochain sells its products in chain stores. Prochain is allocated space in the departmental stores where it can display and market its fashion goods, the space is called ‘the model area’. Prochain pays for the design, decoration and construction of the model areas. The area is used approximately for 2 years after which it must be dismantled at a cost of 20% of the original cost. The current accounting practice is to charge the full cost of the model areas in POL in the year when the area is dismantled.
The accumulated cost of model areas shown in SFP on 31 May 06 is $20m. The company estimated that the average age of its model areas is eight months on 31 May 06. Assume a discount rate of 5.5%
Discuss with suitable computation, how the above issue should be dealt with in the financial statements of Prochain on 31 May 06