Response to the following problems:
Q 1. Capital and Revenue Expenditures
Bristol Company purchased land as a site for construction of a factory. Outside contractors were engaged to:
1. Construct the factory
2. Grade and pave a parking lot adjacent to the factory for the exclusive use of the factory workers.
Operations at the new location began during the year and normal factory maintenance costs were incurred after production began.
Required:
1. Distinguish between capital and revenue (operating) expenditures
2. Indicate how the company should account for and report expenditures for each of the following at the time incurred and in subsequent accounting periods.
a. Purchase of land
b. Construction of factory
c. Grading and paving parking lot
d. Payment of normal factory maintenance costs
Do not discuss capitalization of interest during construction in your response.
Q2. Lump-Sum Acquisition
In 1975, a trial was held to settle a tax dispute between the owners of the Atlanta Falcons, a National Football League franchise, and the Internal Revenue Service. In 1966, the owners had paid $8.5 million to purchase the franchise. They considered $50,000 to be the cost of the franchise (which is not depreciable for income tax reporting), $727,000 was deferred interest, and the remaining $7.7 million was claimed to be the cost of the players' contracts and options. The dispute centered on several variables:
1. How much of the purchase price was assignable to television rights?
2. Is the value assignable to television rights depreciable? If so, what is the expected life?
3. How much of the purchase price was assignable to player contracts and options?
4. Over what life should the value assigned to the players be depreciated?
5. What is the value of the franchise?
Required
1. As an independent accountant, explain the approach you would take and the information you would need to provide advice to the court for the resolution of the points in dispute.
2. Do these valuation issues also create ethical issues?