Capitalizing employees' wages *VS* expensing

  • Thread starter Numbers Afficionado
  • Start date

N

Numbers Afficionado

From what I understand in my intermediate level accounting course, it
is considered an aggressive tactic if a company capitalizes the wages
of their employees. However, I really can't see how the accounting
would differ substantially. Here's my logic:

Case 1. Suppose a company pays out $665,000 a month in wages to its
all its employees, combined. Moreover, the company is mature and in a
"steady-state" condition. Every month, the company expenses this
$665K, and this is pre-taxed.

Case 2. On the other hand, suppose a company capitalizes its wages to
its employees. It capitalizes $100,000,000 @ 7% for 30 years. This
amortizes to about $665K/month. This figure is also paid on a pretax
basis.

If anything Case 2 may even be *worse* since they must account for the
$100,000,000 "loan", which shows up in the debt/equity ratio (now
increased). Also, ROA is lower.
 
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