Solutions_-_Exercises_-_Unit_1

Solutions_-_Exercises_-_Unit_1 - Financial Accounting I...

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Unformatted text preview: Financial Accounting I Grado Administracion de Empresa Exercises Chapter 1: Conceptual Framework Exercise 1.1. Inusual events: Accounting treatment (Problem 7.1, sections a and c; Sutton, 2004, p. 190) Consider the following events. How do you think each should be accounted for? a) b) Solution to Exercise 1.1. (a) Lottery tickets The lottery tickets described in this case fail the asset recognition test. It is not probable that economic benefits will flow to the firm, given the very low odds of guessing correctly the winning numbers. Moreover, the market value of the tickets is not readily determinable since there is no secondary market for tickets. The „investment‟ should be expensed (c) Bonus in the form of shares The issue here concerns the measurement of an asset, namely, executives‟ services. (Note that, in most cases, the company will not record an asset in its end-period accounts since it acquires and consumes the executives‟ services in the same period.) The IASB expresses no preference for the method of valuing assets (or liabilities). However, it argues that firms should account for events according to their substance rather than their form. In light of this, the cost of the bonus (compensation expense) should be recorded at the market value of the shares issued and not at their nominal value. The opportunity cost of the scheme – i.e. the cost of the cash alternative – is approximately €2 million, not €500,000. Dr. Compensation expense, bonus (OE–) 2,000,000 Cr. Contributed capital (OE+) 2,000,000 [Share capital and share premium] Encarna`s comment: We value the shares at MV (20€ per share) because it is higher than nominal value (5€ per share). We need to record the nominal + the premium (15€). Contributed capital is similar to “capital”. Contributed capital is divided into par, or nominal or stated value and additional paid in capital or share premium or contributed capital in excess to par value. See Chapter 3 and 13 Horngren book Exercise 1.2. Accounting for pre-contract costs Exercise 1....
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This note was uploaded on 02/03/2011 for the course ECON 101 taught by Professor Flora during the Spring '11 term at Universidad Carlos III de Madrid.

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Solutions_-_Exercises_-_Unit_1 - Financial Accounting I...

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