Chapter 9 - Solution Manual

Debate 9 2 donated assets team 1 donated assets

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historical cost of the asset, it would not even be considered an expense. Debate 9-2 Donated Assets Team 1. Donated assets should not be reported in a company’s balance sheet. Firstly, a donation is a non- reciprocal transfer. The company did not give up anything to acquire donated assets. Therefore, there is no cost. According to the historical cost principle, the cost of an asset includes all costs that were necessary to acquire an asset and get it ready for its intended use. Since, nothing was expended to acquire the asset or get it ready for its intended use, the historical cost principle would be consistent with reporting no value on the company’s balance sheet.
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183 Secondly, non-reporting of donated assets is consistent with financial capital maintenance, noted by the FASB in the Conceptual Framework as appropriate for financial reporting. Accordingly, financial accounting would report what was done with the dollars invested by owners. Since no investor dollars were spent to acquire a donated asset, there is nothing to report. Finally, not reporting a value for donated assets is objective. Reporting fair value would require subjective estimates that may not be unbiased, or if unbiased may not reflect the fair value of the donated assets. If so, the reported values may not be relevant to users. Team 2. Donated assets should be reported in a company’s balance sheet at fair value. They represent an inflow of assets to the company from non-owner sources. They meet the definition of assets. They are probable future benefits owned or controlled by the company that resulted from a prior transaction or event (the donation). Thus, representational faithfulness would require that they be reported in the balance sheet until used up as an expense. Reporting fair value of donated assets would provide relevant information to users regarding the financial position of the company. The company would not have a hidden asset and the principle of full disclosure would be met. WWW Case 9-12 a. Under current GAAP an asset is considered impaired when the total expected future cash inflows are less than the book value (carrying value) of the asset. That is, the carrying value of the asset if not recoverable. b. Under current GAAP, an impairment loss is equal to the difference between the book value of the asset and its fair market value. 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.
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