Intermediate Accounting I
FASB ASC Assignment – SpringSemester 2014
50 Points
Instructions: You have been asked to comment on the accounting
treatment for various independent transactions by citing the appropriate
section of the FASB ASC. Your first
paragraph(s) should be the citation from the FASB ASC supporting your
decision. Your second paragraph (or
more) should be in your own words explaining how the ASC applies to your
decision – be specific. Show support for
your choice in your second paragraph.
You can include things like why we do things in the manner prescribed by
the FASB ASC, alternative accounting treatment, etc. This is where you show your understanding of
accounting.For all of the
questions assume that you are a for-profit entity. Limit
each question to one citation from the ASC.
If you believe that there is more than one citation from the ASC that is
appropriate, choose the one that you believe is the “best.”You cannot use the
Master Glossary as a citation. Be
sure to “cut and paste” the FASB ASC citation – do not retype it – and show the
citation number as presented in the example below.Only include information from the ASC relevant to your responses – do
not “cut and paste” the complete citation if it is not relevant.
Put your answer to each question on a
separate page(s). Your responses
should be no more than two-typed pages per question, double-spaced, Times New
Roman font size 12, two-sided printing, and stapled (please, no binders or
folders). Put your name and your
course section number at the top of the first page. Be sure
to type “331” (undergraduate) or “531” (graduate)and your class section number after
your name. The due date is Thursday,
April 3, at the start of class. Do not
email me your paper – a hard copy must be turned in. I will not accept any late papers. You must do the work on your own. If you use additional outside sources be sure
to show them at the end of each question to avoid plagiarizing. Your grade will
be based on your answers and your writing-style.Failure to follow the instructions can result in a grade of 0 for the Assignment.
SAMPLE QUESTION: Working as an accountant, you recently
expensed $5,000 in advertising costs (an immaterial dollar amount) for
television ads which will be broadcast in two weeks. You are questioned as to why you expensed
these costs rather than capitalized (debit an asset, e.g., prepaid advertising)
the cost as the ads have yet to be shown on television. Justify why you did this.
SAMPLE ANSWER:
FASB
ASC CITATION:
720-35-05-3 Other
Expenses, Advertising Costs, Overview and Background
(Instructor’s Note: This paragraph below is directly from the
FASB ASC)
The following are some of the
reasons that costs incurred in anticipation of the probable future economic
benefits of advertising generally are expensed:
- a. Financial statement preparers generally
presumed that the benefit period is short.
- b. The periods during which the future economic
benefits probably would be received and the amounts of such benefits could
not be measured and determined easily and objectively.
- c. The advertising costs for some entities were
not material.
- d. Advertising is undertaken to provide or
increase future economic benefits.
(Now you write your
paragraph(s).)
The above section of the FASB ASC
deals with the expensing of advertising costs even if there is a probable
future economic benefit. The probable
future economic benefit would be generated by increased sales (revenues) which
would generate the asset cash (or receivables).
Note that the ASC states “costs incurred” which means that the past
transaction or event has already occurred.
Theoretically, advertising that
has not yet been released (on television, radio, in print, etc.) is an asset
because its’ future economic benefit has not yet been realized. But due to the difficulty of matching the advertising
expense with the expected increase in sales (revenue) in the proper period,
along with the materiality of the cost the ASC allows for immediately expensing
the advertising costs when incurred.
Expensing the advertising cost versus capitalizing (debiting a prepaid
asset account, e.g., prepaid advertising) is assumed not to make a difference
to the users of financial statements’ decision making.
Decision usefulness is a
qualitative characteristic of accounting information discussed in SFAC 8. In addition, consistently expensing the
advertising costs each period will allow the users of financial statements to
have better comparability between (among) periods. Comparability is an enhancing quality of
relevance and faithful representation also discussed in SFAC 8.
The accounting for advertising
costs in this manner parallel’s accounting for other items that have
theoretical justification for capitalization yet are treated as an
expense. Examples include research and
development costs, start-up costs of an organization, and initial net operating
losses.
Etc., etc., etc.
Notice how I expanded the
discussion outside the topic by introducing alternative treatment of
advertising cost, similar items, and even discussed Statement of Financial
Accounting Concept 8,
The
Objective of General Purpose Financial Reporting and Qualitative
Characteristics of Useful Financial Information. But do not force other topics in your
discussion unless they are relevant to your citation.
Your
independent questions to answer are:
1. Your
client is in the music industry and has guaranteed future royalty payments to
their most popular heavy metal band under contract. Should they disclose these future royalty
payments in the notes to the financial statements? Why or why not?
2. The
company that you work for wants to effectively reduce the unit (per share)
market price of their common shares of stock and to obtain wider distribution
and marketability of the stock. Is the method
(form) of achieving this best accomplished by a stock dividend or stock
split?
3. What are
the two factors to consider when recognizing gains and losses? Is either factor more important than the
other?
continued
4.You are using the fair value option for a
qualifying asset. To determine the fair
value of the asset you cannot find a principal market to value the asset. What other option (market) can be used to
determine the fair value of the asset?
FOR STUDENTS ENROLLED AS GRADUATE
STUDENTS (ACT 531) YOU MUST ALSO ANSWER THE FOLLOWING TWO QUESTIONS:
5. 4.
A customer paid a trade account receivable in-full (held by your
company) a month before it was due. The
payment included a pre-computed finance charge, a portion of which needs to be
“rebated” to the customer. What guidance
is given in the ASC regarding “rebate” calculations of this nature?
6. During
November, 2014 you become aware that one of your best customer’s is having
severe financial difficulty. They
currently owe your company a large sum of money for purchases that they made
since August, 2014. On January 15, 2015
you are notified that they have filed for bankruptcy and that your company is an
unsecured creditor and will not receive any money. Your business year-end is December 31, 2014
and you plan to issue your company’s financial statements on February 15,
2015. Should you consider the customer’s
bankruptcy filing on January 15, 2015 when you determine the amount of
uncollectible trade accounts receivable that will be recognized in the
financial statements on December 31, 2014?
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