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FASB: Current Assets, Prepaid Expenses

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1. Locate the Master Glossary in the FASB Codification, and answer the following questions:

a. What is the formal definition in the glossary of the term "Current Assets?"
b. Provide one drill-down reference from the Master Glossary for where the term "Current Assets" is used in the Codification.

2. "A company includes prepaid expenses in current assets if it will receive benefits (usually services) within one year or the operating cycle, whichever is longer." Use the Codification to answer the following questions: (Provide the Codification references for your answers)

a. What are four examples of prepaid expenses listed in the guidance that are generally included in current assets?
b. Guidance stipulates that prepaid expenses are to be classified as current assets, however they do not meet the "conventional" definition of a current asset as they are not realized in cash during the normal operating cycle of the business. What is the discussion provided in guidance supporting how the nature of prepaid expenses results in their classification as current assets?
c. Based on the guidance found in this section of the Codification, if a company prepaid a three year insurance policy and the company's operating cycle is one year, would the prepaid insurance be recorded as a current asset, non current asset, or both?

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a. What is the formal definition in the glossary of the term "Current Assets?"

"Current assets is used to designate cash and other assets or resources commonly identified as those that are reasonably expected to be realized in cash or sold or consumed during the normal operating cycle of the business. See paragraphs 210-10-45-1 through 45-4."

b. Provide one drill-down reference from the Master Glossary for where the term "Current Assets" is used in the Codification.

210-10-45-1 "Current assets generally include all of the following:
a. Cash available for current operations and items that are cash equivalents
b. Inventories of merchandise, raw materials, goods in process, finished goods, operating supplies, and ordinary maintenance material and parts
c. Trade accounts, notes, and acceptances receivable
d. Receivables from officers, employees, affiliates, and others, if collectible in the ordinary course of business within a year
e. Installment or deferred accounts and notes receivable if they conform generally to normal trade practices and terms within the business
f. Marketable securities representing the investment of cash available for ...

Solution Summary

Your tutorial is 487 words and includes references and direct cut-and-paste from the codification on prepaid assets and classification as current or noncurrent.

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FASB ASC: Effective Interest Rate

1. You acquire the outstanding loan (note) of Shepard Company, who is having financial difficulty. Because of the financial difficulty, Shepard Company's credit rating has been downgraded and you acquire the note at a discount. To determine the purchase price of the note you discount it at the effective rate of interest rather than the rate of interest stated on the note. According to the FASB ASC, is it correct to discount the loan at the effective interest rate? (This is not troubled debt restructuring.) Please include the appropriate FASB ASC citation in your answer.

2. Your company began operations on March 1, 2011, and incurred $60,000 of organization costs for starting-up the new business. These costs were the fees you paid to the State that you incorporated in. You expensed these costs rather than capitalizing them as an asset. According to the FASB ASC, is it correct to expense these costs? Please include the appropriate FASB ASC citation in your answer.

3. Your company is suing a competitor for infringing on a patent held by your company. Your company lawyers are certain that your company will win the case and recover $2,500,000 in damages. The case will be heard in court next month and it is expected that the judge will make her ruling this year, before the end of your calendar year. You have been told to make a journal entry today for this contingency by recording a receivable and a gain. You believe that this contingency should not be recorded until it is realized. According to the FASB ASC, is that correct? Please include the appropriate FASB ASC citation in your answer.

4. On June 1, 2010, your company has prepaid a significant amount of money for television advertising during next year's SuperBowl to be broadcasted in February, 2011. You are uncertain as to whether to record the prepaid amount as an asset (prepaid advertising) or expense (advertising expense). According to the FASB ASC, should you capitalize or expense the cost of advertising? (This is not direct-response advertising.) Please include the appropriate FASB ASC citation in your answer.

5. Your intent is to refinance a current note payable with long-term financing. You have demonstrated the ability to refinance in this manner. According to the FASB ASC, should you continue to show the note payable as a current liability? Please include the appropriate FASB ASC citation in your answer.

6. You exchange a note to receive goods. According to the FASB ASC, what two elements make up the note? Please include the appropriate FASB ASC citation in your answer.

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