Chapter 16 - Solution Manual

Current practice requires companies to value

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Current practice requires companies to value noncontrolling interest at fair value. Consequently, goodwill is also valued at fair value. The result is that all assets and liabilities are valued at their respective fair values. The entity theory result would be identical with one possible exception. The entity theorist would use the value of goodwill purchased by the parent to infer the 100% fair value of goodwill and thus the fair value of the noncontrolling interest. Current practice will allow parent companies to do the same, but seems to prefer a separate determination of the fair value of noncontrolling interest based on share price or some other method, and thus the valuation of noncontrolling interest in concert with the valuation of identifiable net assets determines the fair value of goodwill. Current practice requires companies to determine consolidated net income (which is called net income) and then subtract noncontrolling interest income to arrive at parent company net income. This is consistent with entity theory to the extent that both approaches call net income the amount that would otherwise be called total consolidated net income. However, an entity theorist would not then show an allocation in the income statement. Current practice requires that noncontrolling interest be included in the stockholders’ equity section of the balance sheet, but clearly separated from parent company equity. Total equity would include both. Entity theorists consider the net assets as belonging to the entity. Strict entity theorists would not have an equity section of the balance sheet because they see both debt holders and shareholders simply as capital providers. However many entity theorists would argue that because noncontrolling interest is an ownership interest in the subsidiary it is an ownership interest in at least part of the consolidated entity. Thus, it is an equity interest. FASB ASC 16-1 Cost Allocation for a Patent a. Internally developed patents fall under the accounting for research and development costs section of the FASB ASC and the provisions of FASB ASC 730-25-1 and 730-5-2&3 consequently the patent should be recorded as an expense and should not be recorded as an asset. The students’ answers should include the following: 05-2 At the time most research and development costs are incurred, the future benefits are at best uncertain. In other words, there is no indication that an economic resource has been created. Moreover, even if at some point in the progress of an individual research and development project the expectation of future benefits becomes sufficiently high to indicate that an economic resource has been created, the question remains whether that resource should be recognized as
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347 an asset for financial accounting purposes. Although future benefits from a particular research and development project may be foreseen, they generally cannot be measured with a reasonable degree of certainty. There is normally little, if any, direct relationship between the amount of
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