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Chapter 9 - Solution Manual

C less conservative the recoverable amount is equal

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c. Less conservative. The recoverable amount is equal to the gross (total) expected cash flows. This amount would be greater than fair value. Fair value is typically presumed to be the present value of expected future cash flows. Hence, the loss measured using the recoverable amount would be smaller, and income would be higher (not conservative). Conservatism implies that when choosing between two alternatives, the one resulting in the lower net income would be selected. d. Current GAAP measurement of the loss would be more consistent with the economic concept of income. The economic concept views income as the change in wealth (the value of the company) from one period to the next, excluding investments by and distributions to owners. Fair value is a current value measure of wealth, gross future cash flows would not measure current value. Case 9-13 a. The issues discussed in IAS No. 16 are the timing of recognition of assets, the determination of their carrying amounts, and the associated depreciation charges to be recognized. The revised IAS No. 16 did not change the fundamental approach to accounting for property, plant and
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184 equipment. The Board’s purpose in revising the standard was to provide additional guidance on selected matters. b. IAS No. 16 indicates that items of property, plant, and equipment should be recognized as assets when it is probable that the future economic benefit associated with these assets will flow to the enterprise and that their cost can be reliably measured. Case 9-14 The solution to this case is dependent upon the companies selected by the students. A recommended method to check their solutions is to require the downloaded company information to be turned in along with the solution. Financial Analysis Case Answers will vary depending on company selected ________________________________________________ CHAPTER 10 ________________________________________________ Case 10-1 a. Managerial intent plays a significant role in the accounting treatment of investments in equity securities that have readily determinable fair values. When the owner of the securities is unable to exercise significant influence, as in the case of Quip, the accounting treatment is proscribed by FASB ASC 320. If managerial intent is to trade securities to realize short-term gains, they are classified as trading securities. If not they will be classified as available-for-sale securities. For both classifications, the securities are reported as assets in the balance at their fair market value. Unrealized holding gains and losses on securities classified as trading securities are reported on the income statement as current period income. Unrealized holding gains and losses on securities classified as available-for sale securities are reported as a component of stockholders’ equity as other comprehensive income on the balance sheet and in the statement of stockholders’ equity. b. The reclassification would result in the recognition of a cumulative unrealized holding gain of $4,000 ($27,000 - 23,000) on the income statement. c. If management actually intends to sell the stock in 2011 no ethical issue is involved. However, if the stock was purchased for its dividend return, and Maxey does not actually intend to sell it in 2011, it would be unethical to reclassify the stock in order to report the unrealized gain as income in 2010. d. Allowing changes in classifications from available-for -sale to trading can result in income manipulation. It is unlikely that a change in classification would be reported during a period in which the value of the security declined, as was the case for Maxey in 2009. The actual effect
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c Less conservative The recoverable amount is equal to the...

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