Chapter 9 - Solution Manual

Use of historical cost presents the economic facts as

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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. b. Under the present accounting model, the cost of cleanup would be considered cost of land. The cost of land includes its acquisition price and all costs incurred to get it ready for its intended use. In this example the intended use to have a building built on it. Since, the cleanup is necessary before building can begin, the cost of cleanup is a cost to get the land ready for its intended use and should be capitalized as land. Under this scenario the presumption is that the cleanup cost was necessary to acquire the asset, hence it provides future benefit. The cleanup itself provides value because without it the land is not usable as a building site, and would presumable be worth less. Hence, this expenditure fits the definition of an asset. Case 9-11
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178 a. The stewardship role of accounting implies that accountants should report on how moneys were invested in assets and the performance resulting from making those investments. This notion is consistent with reporting assets at historical cost. Long-term assets provide benefits for a number of time periods. Investments are made in fixed assets so that over the long-run revenues will be generated. Fixed asset investments thus generate revenues over multiple accounting periods. The matching principle implies that these revenues should be matched with the cost of generating them. Because an element of this cost is the cost of long-term fixed assets these costs should be matched with the revenues they generate, implying that the cost should be allocated to those periods in which the revenues (benefits) are expected to occur.
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