I want you to do two assignments: 1/Contingencies, 1 page (1 source)
- Discuss when, how and in what amount that companies should report contingent liabilities.
- Find a contingent liability on a company's books and discuss the details of the liability.
2/ I want you to REWRITE 2 cases (case 9-6 & 10-4):
I want you to rewrite the cases. I want 1 page for each case. So the total paper are 3: 1 paper for Contingencies 1 paper for case 9-6 1 paper for case 10-4
Paper 1 - Contingencies, 1 page (1 source)
- Discuss when, how and in what amount that companies should report contingent liabilities.
- Find a contingent liability on a company's books and discuss the details of the liability.
Paper 2 - Rewrite case 9-6
Case 9-6
a. Relative to plant assets, a cost incurred or an expenditure made, that is assumed to benefit only the current accounting period is called a revenue expenditure and is charged to expense in the period believed to benefit. A capital expenditure is similarly a cost incurred or an expenditure made but is expected to yield benefits either in all future accounting periods (acquisition of land) or in a limited number of accounting periods. Capital expenditures (if material in amount) are capitalized, that is, recorded as assets, and, if related to assets of limited life, amortized over the periods believed to benefit.
The distinction between capital and revenue expenditures is of significance because it involves the timing of the recognition of expense and, consequently, the determination of periodic earnings. It also affects the amounts reported as assets whose costs generally have to be recouped from future periods' revenues.
If a revenue expenditure is improperly capitalized, current earnings are overstated, assets are overstated, and future earnings are understated for all the periods to which the improperly capitalized cost is amortized. If the cost is not amortized, future earnings will not be affected but assets and retained earnings will continue to be overstated for as long as the cost remains on the books. If a nonamortizable capital expenditure is improperly expensed, current earnings are understated and assets and retained earnings are understated for all periods for which unamortized cost should have remained in the accounting records. If an amortizable capital expenditure is improperly expensed, current earnings are understated, assets and retained earnings are understated, and future earnings are overstated for all periods to which the cost should have been amortized.
b. Depreciation is the accounting process of allocating an asset's historical cost (recorded amount) to the accounting periods benefited by the use of the asset. It is a process of cost allocation, not valuation. Depreciation is not intended to provide funds for an asset's replacement; it is merely an application of the matching concept.
c. The factors relevant in determining the annual depreciation for a depreciable asset are the initial recorded amount (cost), estimated salvage value, estimated useful life, and depreciation method.
Assets are typically recorded at their acquisition cost, which is in most cases objectively determinable. But cost assignments in other cases --"basket purchases" and the selection of an implicit interest rate in asset acquisition under deferred-payment plans--may be quite subjective involving considerable judgement.
The salvage value is an estimate of an potentially realizable when the asset is retired from service. It is initially a judgment factor and is affected by the length of its useful life to the enterprise.
The useful life is also a judgment factor. It involves selecting the "unit" of measure of service life and estimating the number of such units embodied in the asset. Such units may be measured in terms of time periods or in terms of activity (for example, years or machine hours). When selecting the life, one should select the lower (shorter) of the physical life or the economic life to this user. Physical life involves wear and tear and casualties; economic life involves such things as technological obsolescence and inadequacy.
Selecting the depreciation method is generally a judgment decision; but, a method may be inherent in the definition adopted for the units of service life, as discussed earlier. For example, if such units are machine hours, the method is a function of the number of machine hours used during each period. A method should be selected that will best measure the portion of services expiring each period. Once a method is selected, it may be objectively applied by using a predetermined, objectively derived formula.
d. Because revenue usually represents an inflow of funds, and expense usually represents an outflow of funds, net earnings represent a net inflow of funds. However, the revenues and expenses reported in the income statements are accrual-based, not cash-based measures. Hence, net income must be adjusted to measure the net cash flows from operations. Depreciation reduces reported net earnings but does not involve an outflow of cash. Therefore, it is added back to reported net earnings to calculate cash provided by operations. On a statement of cashflows, depreciation should be clearly shown as an adjustment to net earnings not requiring a use of cash rather than be shown as a source of cash. Depreciation is not a direct source of cash. It can be considered an indirect source only through income tax savings.
Paper 3 -
Rewrite case 10-4
Case 10-4
a. Research, as defined in Statement of Financial Accounting Standards No.2, is "planned research or critical investigation aimed at discovery of new knowledge with the hope that such knowledge will be useful in developing a new product or service...or a new process or technique...or in bringing about a significant improvement to an existing product or process."
Development, as defined in Statement of Financial Accounting Standards No. 2, is "the translation of research findings or other knowledge into a plan or design for a new product or process for a significant improvement to an existing product or process whether intended for sale or use."
b. The current accounting and reporting practices for research and development costs were promulgated by the Financial Accounting Standards Board (FASB) in order to reduce the number of alternatives that previously existed and to provide useful financial information about research and development costs. The FASB considered four alternative methods of accounting: (1) charge all costs to expense when incurred; (2) capitalize all costs when incurred: (3) selective capitalization; and (4) accumulate all costs in a special category until the existence of future benefits can be determined. The FASB concluded that all research and development costs should be charged to expense as incurred. (Statement of Financial Accounting Standards No. 2 does not apply to activities that are unique to enterprises in the extractive industries, and accounting for the costs of research and development activities conducted for other under a contractual agreement is a part of accounting for contracts in general and is beyond the scope of that statement.)
In reaching this decision, the FASB considered the three pervasive principles of expense recognition: (1) associating cause and effect; (2) systematic and rational allocation, and (3) immediate recognition. The FASB found little or no evidence of a direct causal relationship between current research and development expenditures and subsequent future benefits. The high degree of uncertainty surrounding future benefits, if any, of individual research and development projects makes it doubtful that there is any useful purpose to be served by capitalizing the costs and allocating them over future periods. In view of the above, the FASB concluded that the first two principles of expense recognition do not apply, but rather that the "immediate recognition" principle of expense recognition should apply.
The high degree of uncertainty about whether research and development expenditures will provide any future benefits, the lack of objectivity in setting criteria, and the lack of usefulness of the resulting information led the FASB to reject the alternatives of capitalization, selective capitalization, and accumulation of costs in a special category.
c. In accordance with Statement No. 2 of the Financial Accounting Standards Board, the following costs attributable only to research and development should be expensed as incurred:
a. Design and engineering studies.
b. Prototype and manufacturing costs.
c. Administrative costs related solely to research and development.
d. The cost of equipment produced solely for development of the product ($200,000).
The remaining $300,000 of equipment should be capitalized and shown on the statement of financial position at cost. The depreciation expense resulting from the current year is a part of research and development expense for the year. The market research direct costs and related administrative expenses are not research and development costs. These costs are treated as period costs and are shown as expense items in the current earnings statement.
Attachment:- case.pdf