(Case 1) is from page 603 in your text. Please answer these questions directly referencing from FASB codification, not your own “rule” or “understanding”.
Your client is in the planning phase for a major expansion, which will involve the construction of a new warehouse. The assistant controller does not believe that interest cost can be included in the cost of the warehouse, because it is a financing expense. Others on the planning team believe that some interest cost can be included in the cost of the warehouse, but no one could identify the specific authoritative guidance for this issue. Your supervisor asks you to research this issue.
(a) Is it permissible to capitalize interest into the cost of assets? Provide authoritative support for your answer.
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(b) What are the objectives for capitalizing interest?
(c) Discuss which assets qualify for interest capitalization.
(d) Is there a limit to the amount of interest that may be capitalized in a period?
(e) If interest capitalization is allowed, what disclosures are required?
(Case 2) is from page 652 in your text.
Matt Holmes recently joined Klax Company as a staff accountant in the controllerAc€?cs office. Klax Company provides warehousing services for companies in several Midwestern cities. The location in Dubueqe, Iowa, has not been performing well due to increased competition and the loss of several customers that have recently goes out of business. MattAc€?cs department managers suspects that the plant and equipment may be impaired and wonders whether hjtose assets should be written down. Given the companyAc€?cs prior success, this issue has never arisen in the past, and Matt has been asked to conduct some research on this issue.
(a) What is the authoritative guidance for asset impairments? Briefly discuss the scope of the standard. (i.e. explain the types of transactions to which the standard applies.)
(b) Give several examples of events that would cause an asset to be tested for impairment. Does it appear that Klax should perform an impairment test? Why?
(c) What is the best evidence of fair value? Describe alternate methods of estimating fair value.
Also answer the followings from page 695 in your text.
(d) Your friend Harry does not understand the concept of an indefinite-life intangible assets. He wonders, “does this mean the life is infinite? What does the authoritative literature say about indefinite-life intangible assets?
(e) What guidance does the codification provide the disclosure of research and development (R&D) costs?
(f) What is the nature of the authoritative guidance for advertising costs for entertainment companies?
Teddy Bear Casino Jackpots
Scenario: You have recently graduated from UMD and are now employed as a staff accountant. at Teddy Bear Casino, DuluthAc€?cs newest casino. Your boss, the controller, is experienced in preparing casino financial statements. However, it has been many years since he was responsible for recording transactions. He comes to you with the following issue he would like you to research.
The casino has 200 slot machines which payout a set jackpot amount of $3,000 (base jackpot) roughly every 6 months. The casinoAc€?cs financial statement year-end is September 30, 2012. The 200 machines have been in service since June 1, 2012. However, as of September 30, patrons have failed to “win” a jackpot on these machines. The controller has asked you to determine how much liability to accrue (if any) as of September 30, 2012. The controller also mentioned that jackpots paid out by casinos are recorded as contra-revenues as opposed to being recorded as expenses.