Fundamental Accounting Principles
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Case 1.
A recently issued FASB standard requires that an impairment loss be recognized if the sum of the expected future net cash inflows (undiscounted and without interest charges) is less than the carrying value of the asset. The amount of the impairment loss recognized is the amount by which the carrying amount of the asset exceeds the fair value of the asset.
• Provide several examples of events or changes in circumstances that indicate that the recoverability of the carrying amount of an asset may have been impaired.
* Evaluate the recognition criterion proposed by the FASB, specifically addressing the issue of using the undiscounted sum of the future net cash flows.
Case 2.
Assets constructed for a firm's own use present the problem of whether to capitalize interest on the funds invested during the time required to prepare the assets for their intended use. Current generally accepted accounting principles as specified by the FASB in Statement No. 34 require the capitalization of interest on borrowed capital, but not to exceed the total interest paid by the firm.
* Evaluate the propriety of the approach currently required in the professional pronouncements now in effect, and whether other approaches may be valid and should be incorporated into G.A.A.P.
Case 3.
George Harmon is the president of the Utah Western Railroad Company. The Utah Western is a bridge line that receives traffic from the Union Pacific Railroad and the Burlington Northern railroads at Salt Lake City, Utah, and hauls the freight to Denver, Colorado, for connections with other lines to points east. Recently, traffic on the Utah Western has increased dramatically and the railroad is in need of additional locomotives to haul its trains. Accordingly, George is considering leasing locomotives to meet the demands of this increase in traffic until new engines can be ordered if the surge subsides.
* As the controller of the railroad, George has asked you to advise him as to the disadvantages associated with leasing generally.
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Solution Summary
This question involves the fundamentals of accounting.
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Case 1.
A recently issued FASB standard requires that an impairment loss be recognized if the sum of the expected future net cash inflows (undiscounted and without interest charges) is less than the carrying value of the asset. The amount of the impairment loss recognized is the amount by which the carrying amount of the asset exceeds the fair value of the asset.
• Provide several examples of events or changes in circumstances that indicate that the recoverability of the carrying amount of an asset may have been impaired.
When the stock price of a company has decreased substantially and has shown no signs of recovery in the near future. For example, consider the stock price of Nortel in the year 2000 was well above $100 per share. Now the stock price is less than $10 per share. There can be no realistic expectation that the stock price will even come close to reaching it former value. As a result, the value of the stock, on the company's books must be written down to more accurately reflect the value of the stock.
Another example would be when an asset is no longer being utilized. If, for ...
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