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Applying GAAP to Record Assets

Assignment Choice #2: Applying GAAP to Record Assets Complete both sections 1 and 2. Recording Assets Smith Company has developed a computerized machine to assist in the production of appliances. It is anticipated that the machine will do well in the marketplace; however, the company lacks the necessary capital to produce the machine. Roseline Rowland, secretary-treasurer of Smith Company, has offered to transfer land to the company to be used as collateral for a bank loan. In exchange for the land transfer, Roseline will receive a five-year employment contract and a percentage of any profits earned from sales of the new machine. The title to the land is to be transferred unconditionally. If Smith defaults on the employment contract, a lump-sum cash settlement for lost wages will be paid to Roseline. The land transfer may be a good business move, but it raises a number of questionable accounting issues. Smith’s controller has given you the task of writing a detailed report that summarizes the options available in accounting for the land transfer. Your report should outline the arguments both for and against recording the land as an asset on Smith’s books. Also, discuss how the land should be valued if it is recorded as an asset. Two college students, Elizabeth Stephens and Rachel Marcus, organized Concept, Inc. Elizabeth and Rachel both used the internet extensively while in high school and became very proficient web surfers. Elizabeth has a special ability for designing Web-based games that challenge the reasoning power of players. Rachel saw great potential in marketing Elizabeth’s products to other web users, and so the two began Concept. Sales have exceeded expectations, and they have added 10 employees to their company to design additional products, debug new programs, and produce and distribute the final software products. Because of its growing size, increased capital is needed for the company. The partners decide to apply for a $100,000 loan to support the growing cost of research. As part of the documentation to obtain the loan, the bank asks for audited financial statements for the past year. The company hired Timothy Pressly, CPA, to prepare the statements. Concept had produced a preliminary income statement that reported net income of $35,000. After reviewing the statement, Pressly indicates that the company actually had a $10,000 loss for the year. The major difference relates to $45,000 of wage and material costs that Concept had capitalized as an intangible asset, but that Pressly determined should be expensed. The partners are confused because they thought they were applying the matching principle. Pressly allowed capitalization of the equipment but not the web development costs. The partners are worried that the loss calculated is unjustified and that they will not be profitable under “Pressly’s requirements.” What major issues are involved in this case? Which position best reflects GAAP? Asset Write-Downs Professor Linda DeAngelo (1988) found evidence suggesting that when management of a company is ousted under fire, the new management tends to take an earnings “bath” after gaining control. A “bath” is a large reduction in earnings due to asset write-downs, reorganization charges, discontinuance of segments, and other extraordinary charges. What reasons could new management of a company have for wanting to “take a bath” in its first year? Your well-written paper must be two to three pages in length, in addition to the title and reference pages, and be formatted according to the CSU-Global Guide to Writing and APA Requirements. Cite at least three peer-reviewed sources, in addition to the required readings for this module. Reference DeAngelo, L. E. (1988). Managerial compensation, information costs, and corporate governance. Journal of Accounting and Economics, 10(1).
Assignment Choice #2: Applying GAAP to Record Assets Complete both sections 1 and 2. Recording Assets Smith Company has developed a computerized machine to assist in the production of appliances. It is anticipated that the machine will do well in the marketplace; however, the company lacks the necessary capital to produce the machine.
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47560
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8 October 2016
COMPLETED ON
9 October 2016
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