Chapter 9 - Solution Manual

50 1 because of the significant effects on financial

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50-1 Because of the significant effects on financial position and results of operations of the depreciation method or methods used, all of the following disclosures shall be made in the financial statements or in notes thereto: a. Depreciation expense for the period b. Balances of major classes of depreciable assets, by nature or function, at the balance sheet date
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181 c. Accumulated depreciation, either by major classes of depreciable assets or in total, at the balance sheet date d. A general description of the method or methods used in computing depreciation with respect to major classes of depreciable assets. FASB ASC 9-5 Overhaul Costs in the Airline Industry Select the industry link and then choose airlines. Select Property and Equipment and then Initial Measurement . 908-360-39 Overhaul Costs 30-1 This guidance addresses the following methods of accounting for overhaul expenses: a. Built-in overhaul method b. Deferral method. The direct expensing method is addressed in Subtopic 908-720 (see paragraph 908-720-25-3). > > Built-in Overhaul Method 30-2 The built-in overhaul method is based on segregation of the aggregate aircraft costs into those components that shall be depreciated over the useful life of the aircraft and those that require overhaul at periodic intervals. Thus, the estimated cost of the overhaul component included in the purchase price shall be set up separately from the cost of the airframe and engines. > > Deferral Method 30-3 Under the deferral method, the actual cost of each overhaul shall be capitalized. Debate 9-1 Team 1 Argue for the capitalization of interest The FASB considers interest incurred during construction of the asset as an element of historical cost. Historical cost is the amount of cash, or its equivalent, paid to acquire an asset. It includes the purchase price and all cost necessary to acquire the asset and get it ready for its intended use. Use of historical cost presents the economic facts as they actually occurred. Thus, it is relevant and reliable. It is relevant because accountants are stewards to owners. The stewardship role implies that accountants must report how moneys invested are spent. This information is disclosed by historical prices paid to acquire assets. Historical cost is reliable because it is objective and verifiable. Historical exchange prices are objectively determinable and verifiable because they are based on evidence that an exchange has taken place and amounts are typically supported by a paper trail, e.g., invoices. Hence, they these measurements represent what they purport to represent and as such are represenationally faithful and neutral. An asset is defined as an economic resource that has future benefit to the entity and results from prior transactions and events. The prior transaction resulting in its existence is the exchange that occurred when the asset was acquired. Those moneys were invested in the asset to provide economic benefit to the company. So long as the asset is in use, cost provides benefit. Hence, cost is a relevant attribute to report to investors, creditors, and other users.
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182 According to SFAS No. 34, interest during construction is a cost of getting the asset ready for its
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