Chapter 8 - Solution Manual

Because monetary items are claims to or against

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because monetary items are claims to or against specific amounts of money; all other assets and liabilities are nonmonetary. The monetary working capital presentation would list as assets : cash, cash equivalents, temporary investments, and receivables and would list as liabilities current payables. It would not include inventories, prepaid assets or deferred liabilities. Also more meaningful information could be provided if all temporary investments were measured by their current market price, including securities held to maturity. This presentation would have the following advantages: (1) it would be a more representative measure of liquidity and buffer because it would be more closely associated with future cash flows, (2) it would provide more information about actual flows because only items expected to be realized or retired by cash transactions would be included, and (3) it would allow greater predictive ability because actual cash flows could be traced. Debate 8-3 Capitalization vs expense Team 1: Present arguments for capitalizing all of the above costs. Your arguments should utilize the Conceptual Framework definitions and concepts.
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165 The primary argument in favor of capitalizing all of the costs is the historical cost principle. According to the historical cost principle, the historical cost of an asset is all costs that it takes to acquire the asset and get it ready for its intended use. To apply the historical cost principle to an item, it must first meet the definition of an asset. We argue that all of these costs (the purchase price of the property, the cost to remove the building, the cost to remove the tanks and refine the soil) are necessary to acquire the site for the restaurant and thus will provide future economic benefit. We also argue that the cost to construct the building, as well as the cost of the avoidable interest that was incurred during construction, were necessary to acquire the building and get it ready for its intended use. Thus, they should all be capitalized as part of the historical cost of the assets land and building. 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. Without question, the acquisition of the site for the restaurant meets this definition of an asset. It will provide a future economic benefit because the restaurant will be built there and is intended to generate a profit for its owner(s). No one would argue that the purchase price of $900,000 should be capitalized as part of the asset’s cost. In addition it has been standard accounting practice (and thus a part of GAAP) that the $30,000 cost to remove a building is a part of getting the land ready for its intended use and thus should be capitalized as land, along with the purchase price.
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