Chapter 9 - Solution Manual

If users wish to value the firm fair value of firm

Info icon This preview shows pages 2–4. Sign up to view the full content.

View Full Document Right Arrow Icon
Framework's qualitative criterion, relevance. If users wish to value the firm, fair value of firm assets is relevant to their decision models. The primary defense of recording a donated asset at fair value is that fair value represents the cash equivalent value of the asset. If cash had been received, instead, the dollars would have been recorded. Then the dollars received could have been used to purchase the asset at fair value. Recording the inflow as revenue is consistent with the Conceptual Framework's definition of earnings, as the change in net assets from nonowner sources. The asset was received from a third party, not an owner. Its inflow adds value to the firm. ii. Recording the donated asset at fair value is inconsistent with the cost principle. According to the cost principle, the recorded cost of an asset is equivalent to the consideration given in return. Because a donation is a nonreciprocal transfer, nothing was given in return, hence, no cost can be recorded. A second, though less convincing argument, would be that fair value may be too subjective to be reliable. It can also be argued that if fair value is the appropriate and relevant measurement for a donated asset, then the credit should be considered a gain, not a revenue. The Conceptual Framework defines revenues as inflows from the production or delivery of goods and services. A donated asset does not result from the production or delivery of goods or services. Rather it is more like a gain - resulting from peripheral or incidental transactions. iii. Under previous practice, the credit for fair value of the donated asset would have been to donated capital. Because the credit to revenue required under FASB ASC 958-605 is closed to retained earnings, the composition of stockholders' equity would differ but total stockholders' equity is unaffected by the SFAS No. 116 requirements. Comparative balance sheets containing summary information would appear the same as before, as follows: ASSETS LIABILITIES $350,000 (800,000 + 100,000) $900,000 S/E 550,000 Hence, balance sheet ratios such as debt/equity are not affected. Placing the inflow of fair value on the income statement would increase income from continuing operations, net income and EPS. Case 9-2 a. Postponing the purchase of the equipment until the next year will have the following financial statement impacts assuming that the equipment will be placed into use when it is purchased: Balance Sheet:
Image of page 2

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
169 Plant assets will be less by Cost $400,000 Less Accumulated Depr 20,000 $380,000 ((400,000/10) x 1/2) Notes Payable will be less by $400,000 Interest Payable will be less by 10,000 ((400,000/10) x 1/4) Deferred Tax Liability will be less by Accumulated Depr - tax $57,143 (400,000 x 2/7 x 1/2) Accumulated Depr - books 20,000 Temporary difference $ 37,143x tax rate Income Statement: Interest Expense will be less by $10,000 Depreciation Expense will be less by $20,000 Income Tax Expense will be more by the tax rate times lost interest and depreciation tax shield (tax rate x ($10,000 + 57,143)) and less by the change in the deferred tax liability (tax rate x $37,143).
Image of page 3
Image of page 4
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern