Chapter 8 - Solution Manual

In addition entre is required by the government to

Info icon This preview shows pages 22–24. Sign up to view the full content.

View Full Document Right Arrow Icon
In addition, Entre is required by the government to remove underground tanks and to refine the soil. The cost to remove the tanks is $40,000 and the cost to refine the soil is $30,000. Like the cost incurred to remove the building these costs are necessary to get the land ready to build the building. Without incurring these costs, Entre cannot build the restaurant and will not be able to receive future benefits (return) from his investment. Thus, we argue that these costs meet the definition of an asset and are consistent with the historical cost principle. Obviously, the $1,800,000 cost incurred to construct the building to house the restaurant should be capitalized as part of the building cost. The building is arguably an asset. It will be used as Entre’s place of business where his employees will prepare and serve food to customers. Thus, it meets the definition of an asset because it provides a probable future benefit. In addition, the FASB determined in SFAS No. 34 , that avoidable interest incurred to construct an asset, such as Entre’s restaurant, should be capitalized as a part of the cost of the asset. It is a necessary cost to construct the asset because had the asset not been constructed the debt used to finance the construction and thus the cost of borrowing (interest) could have been avoided. Because it could have been avoided, the interest is deemed to be necessary to acquire the asset and get it ready for its intended use. Thus, capitalization of $22,000 of avoidable interest incurred during construction as part of the asset’s cost is consistent with the historical cost principle. Team 2: Criticize capitalization of the cost to remove the tanks and refine the soil and the capitalization of interest during construction. Do they provide added service potential? Your arguments should utilize the Conceptual Framework definitions and concepts We believe that neither the costs of removing the tanks and refining the soil nor the cost of avoidable interest incurred during construction of the restaurant should be capitalized and reported as costs of assets. Our argument is based primarily on the position that these expenditures do not add future service potential to the land or to the building. Thus, they do not meet the definition of an asset. This means that if we report these costs as assets we would be violating the qualitative characteristic of
Image of page 22

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
166 representational faithfulness. We would be reporting a non-asset as an asset. Thus, it would not be what it purports to be. SFAC No. 6 defines an asset as a probable future economic benefit obtained or controlled by a particular entity as a result of a past transaction. Neither removing the tanks at a cost of $40,000 nor incurring a $30,000 expenditure to refine the soil once the tanks are removed does not increase the expected future cash inflow from the operation of the restaurant. Thus, it provides no future benefit and is not an asset.
Image of page 23
Image of page 24
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern