Auditors want to make sure that marketing expenses

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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) Casino (–A) 75,000,000 Land (–A) 17,000,000 Gain on Sale (Ga, +SE) 18,000,000 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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