Reference no: EM13567256

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.

928-340Currently Viewing:

928 Entertainment-Music

340 Other Assets and Deferred Costs

25 Recognition

General

• Licensor Accounting
• Record Master Costs

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?