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Unformatted text preview: asinos and the land.
When assets are purchased in a group for one purchase price, as they were in this case, a common
method to determine the purchase price for each individual asset acquired is to use the assets' relative
fair market values. The fair market values of the individual assets would often be determined by an
independent appraiser. b. Cash (+A)
Gain on Sale (Ga, +SE)
Sold casino and land. 110,000,000 c. For the purchasing company, it would be necessary to allocate the total $110 million cost to the
casino and land. This could be done based on an appraised fair market value. The land without the
casino would be appraised first; the difference between the $110 million and the appraisal would be the
value of the casino. d. Cost of hotel: $110,000,000 – $43,000,000 = $67,000,000
Depreciation per year: $67,000,000 ÷ 25 years = $2,680,000 per year ID9–2
One of the underlying goals of an accounting system is to properly match revenues with expenses.
There are many marketing costs that will help to produce revenue for the company over multiple
periods. If the company expenses all of these marketing expenses in the first year, then net income
for the first year will be understated and then overstated in future years when the revenue produced is
not matched with the marketing expenses incurred to generate it. At the same time it is very difficult
to determine a rational way to allocate marketing costs to the revenue that it produces.
Management, separate from any desires to influence the stock price, will generally want to match its
marketing expenses with the revenues that these expenses produce. Management wants to be able
to evaluate the impact of its marketing efforts. Shareholders may want to see a system of charging
marketing expenses that will have the best impact on stock performance. In the early years of a
company this may mean capitalizing heavy marketing from the early years and defering the expense
until the company has higher levels of revenue to absorb these expenses. Auditors want to make
sure that marketing expenses are handled consistently and in a manner that fairly represents the true
economic value of these
37 ID9–2 Concluded expenditures. Auditors also tend to be conservative when there is uncertainty as to the future value of
an asset. Will these marketing costs from this year truly have value in future years? Since this is a
subjective estimate, auditors may want to expense all marketing expenses in the year incurred. ID9–3
a. The main issue to be considered is whether the capital expenditure is a betterment or simply
maintenance. To be considered a betterment, the expenditure must (1) increase the asset's useful
life, (2) increase the quality of the asset's output, (3) increase the quantity of the asset's output, or
(4) reduce the cost associated with operating the asset. If the expenditure meets one of these
criteria, the expenditure should be capitalized. Otherwise, the expenditure should be expensed. b. The amount may be immaterial. c. Depreciation per year represents the remaining net cost of an asset allocated over the asset's
estimated remaining useful life. In this particular case, the remaining net cost equals the sum of
the asset's book value at the time of refurbishment and the cost of the refurbishment less the
estimated salvage value of the plant. This amount would be depreciated over the estimated useful
life of the "new" plant. ID9–4
a. EADS is expensing a portion of its research and development costs, but the company is not
expensing the entire amount. The portion not expensed is capitalized on the balance sheet as an
asset (Capitalized Development Costs) and amortized as an expense in future periods. b. Under U.S. GAAP, the entire amount would be expensed. c. The R & D expense under US GAAP would have been 2,699 million euros plus 31 million euros. d. In a comparison of earnings IFRS vs. U.S. GAAP for EADS, the IFRS net income overstates
earnings by the 31 million euros that were not expensed (but were instead capitalized to the
balance sheet). Had the company used U.S. GAAP, total expenses would have been 31 million
euros higher. ID9–5
38 One of the underlying goals of an accounting system is to properly match revenues with expenses.
There are many advertising and research & development costs that will help to produce revenue for the
company over multiple periods. If the company expenses all of these expenses in the first year, then
net income for the first year will be understated and then overstated in future years when the revenue
produced is not matched with the expenses incurred to generate it. At the same time it is very difficult
to determine a rational way to allocate these costs to the revenue that it produces. When these costs
are incurred it is extremely difficult to know the revenue, if any, that will be produced in future periods.
The capitalization of software development costs has the opposite effect. Expenses that are incurred
in the current year will not impact...
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