ACCT 0635 Contemporary Professional Accounting Problems

FASB Accounting Standards Codification Problem Set

Directions: Use the FASB Accounting Standards Codification to answer each of the following
independent cases.

FASB Codification Tool login information:

http://aaahq.org/FASB/Access.cfm
Click on FASB User Login
Username: AAA52248
Password: f5S2tCF
Click the first link: FASB Accounting Standards Codification

Problem 1

In determining whether the equity method should be applied to an investment in common stock, an
investor assesses whether it can exercise significant influence over the investee. Significant influence can
be evaluated in quantitative terms (i.e. investor owns 20% or more of the investees outstanding stock),
and in qualitative terms. What are three qualitative characteristics that an investor should examine in
determining whether to account for an investment using the equity method? Provide the specific
Codification reference, indicating where this information was located.

Problem 2

Your audit client, ABC Co., purchased U.S. Treasury notes 5 years ago, which are now three months
away from maturity. ABC Co. has asked you whether it is appropriate to reclassify these notes into the
current assets category of its balance sheet, as cash equivalents.

a. Provide a response to your client, including Codification references.

b. Describe the approach that you followed in locating the relevant guidance referenced in part a.

Problem 3

Your client is in the planning phase for a major plant 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, as it is a financing expense. Others on the planning team believe that some interest can be
included in the cost of the warehouse, but could not identify the specific authoritative guidance for the
issue. Your audit senior asks you to research the issue. Provide authoritative support for each of the
following:

a. Is it permissible to capitalize interest into the cost of assets?

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?

Problem 4

Nelson Industries, a U.S. based company, has issued over the years 1 million shares of common stock to
shareholders. Currently, in evaluating ownership, Nelson has entered into a stock repurchase agreement
to buy a significant block of its stock from a major stockholder that represents a controlling interest in
the company.

The major stockholder agrees to sell, but at a price higher than the current market price. The
stockholder has agreed to a price of $25 per share, which is in excess of the current market price of
$20 per share.

Nelsons controller is somewhat unsure of the proper accounting for this purchase. She believes that the
treasury stock purchase should be recorded at the $20 per share price and the excess written off as some
type of loss since the purchase agreement does not include any type of other rights or privileges. The
controller seeks your advice as to the proper accounting for the treasury stock repurchase.

Required:
Utilize the FASBs Codification System to provide a recommendation to the controller for the treasury
stock purchase transaction. Provide specific Codification references.

Problem 5

Michelle: How did you do on that accounting exam?

Nicole: I just missed a B by two points.

Michelle: At least you passed the exam!

Nicole I know. But I was hoping for a higher grade since I studied so hard for this exam.

Michelle: Maybe there were some questions that the professor graded wrong.

Nicole: I agree. We had one question that asked How should a deposit on a piece of
equipment that is to be purchased within one year be classified on the entitys
balance sheet?

Michelle: Thats easy. Even I know the answer to that question. It would be recorded as a current
asset.

Nicole: Thats exactly how I answered the question and it was graded wrong.

Michelle: You need to go to the professor and tell him that the grading guide is in error.

Nicole: Before I do that I what to be sure of the answer.

Required:
Utilize the FASBs Codification System to provide a specific reference to Nicole as to her issue.
Problem 6
On May 15, 2016 a customer of Hot Dogs R Us became seriously ill after eating at one of the companys
hot dog stands. The customer filed a lawsuit against Hot Dogs R Us on June 1, 2016. At December 31,
2016, Hot Dogs R Us estimated its probable loss in connection with the incident to be $50,000. In
January 2017, before Hot Dogs R Us issued its financial statements, a judge ruled in favor of the customer
and awarded the customer $80,000 in damages. Should the company recognize the effects of this ruling
in its 2016 financial statements? Use only the Codification to prepare your response. Include in your
response specific Codification references.