1. The three types of costs incurred in coal production are acquisition costs (costs to acquire the coal rich lands plus the present value of future cash flows necessary to restore the sites minus the cost of the land), exploration costs (costs of mining), and development costs (pipes, roads, and so on, to extract and transport the coal to customers).
Required:
Should each of these costs be capitalized or expensed? Explain
2. U.S. GAAP requires firms to expense immediately all internal expenditures for R&D costs. Alternatively, U.S. GAAP could require firms to capitalize and subsequently amortize all internal expenditures on R&D that have future potential.
Required:
Why have standard setters chosen not to allow the capitalization alternative? How would analysts be better served if U.S. GAAP required capitalization of R&D costs?
3. Coffee Corp. purchased 40% of the outstanding shares of Cream Corp. for $1,854,000. The investment allows Coffee to exert significant influence over the operations of Cream. During 2011 Cream recognized net income of $2,450,000 and paid $560,000 in dividends. Discuss how Coffee should account for its investment in Cream and how the information would appear in Coffee's balance sheet, income statement, and cash flow statement.