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Chapter 17 - Solution Manual

Because it is apparent from the facts in the case

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because it is apparent from the facts in the case that the lessee will not derive benefit for virtually all of its useful life (at least 75% thereof). Nor do the amount and timing of the lease payments imply that the lessee is essentially paying for the asset (present value of minimum lease payments at least 90%). The implication of the agreement is that the lessor owns and controls the asset, but is allowing the lessee to use the asset temporarily for a fee, or rent. If the leased asset does not belong to the lessee then payments for its use are merely periodic rent and as such should be treated as rent expense. As such they do not represent payments on a liability. Thus, it would be inappropriate to record a liability for a lease that is not in essence a purchase of an asset. Debate 17-2 Booking the Budget Team 1 In general, APB Opinion No. 28 (FASB ASC 270) supports the integral view of interim reporting. According to the integral view, interim periods are an integral part of the annual period, thus revenues and expenses might be allocated to various interim periods even though they occurred only in one period. The APB noted that interim financial information is essential to provide timely data on the progress of the enterprise and that the usefulness of the data rests on its relationship to annual reports. Accordingly, the Board determined that interim periods should be viewed as integral parts of the annual period and that the principles and practices followed in the annual period should be followed in the interim period. However, certain modifications were deemed necessary in order to provide a better relationship to the annual period. Under APB Opinion No. 28 (FASB ASC 270), costs that are related to revenues should be allocated and matched with revenue in the same manner as the annual report. We argue that Microsoft’s marketing expenditures are related to sales and can be allocated across interim periods so that the results of interim periods better relate to the results of operations reported in the annual report. For example, Microsoft may make marketing expenditures in one accounting period that result in sales of another period. Since no causal relationship can be adequately Unknown Deleted: Unknown Deleted:
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382 determined, allocation across accounting periods of the total expected cost (such as those in the budget) would provide a reasonable approximation of the annual results. The above is consistent with cost estimates and allocations that are allowed under APB Opinion No. 28 (FASB ASC 270) . The Opinion APB allows companies to use estimated gross profit rates to estimate and report interim cost of goods sold. It also allows companies to estimate accruals to be made at a later date in an effort to achieve a fair measure of results of operations for the annual period and to present fairly the financial position at the end of the annual period.
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