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Financial Statement Reporting and Disclosures

Indicate how each of the following items would be recognized in a company's financial statements for 2007, and what elements would be recognized. If no elements are to be recognized, note this in the answer. For each item, conceptually justify why the elements are to be recognized or why none should be recognized.

Q: The estimated future cost of restoring a mining site to its original condition?
A: Should be recognized in the financial statements of 2007 and therefore the restoration should be based on fair value because the restoration should be classified as a long lived Asset or a long term Asset. It is the company's legal obligation to reflect this restoration cost as a liability thus should also be capitalized.

Q: A non-revocable commitment to buy equipment in the following year?
A: I need assistance.

Q: The right to use an international industrial trademark over the next five years, purchased from a Taiwanese computer manufacturer?
A: The trademark should be recorded on the financial statement as an intangible Asset at COST because it is not internally generated hence it is a purchase. The company has purchased this trademark because it is capable for generating income for the company therefore the company has exclusive right to use the trademark for 5 years. However if the trademark life is only for five years than the company should amortize and expense the value.

Q: The value of customer lists built up over time?
A: The value of the customer lists built up over time can't be recognized on the financial statements because accounting is not tailored to measure this therefore it is considered non-monetary information also because of limitation i.e. software's. Even though the customer list is probably what's driving the company it still can't be recognized although senior managements can convey this message through letters to the shareholders in valuing how important the customers are for the business.

Q: Increases in the value of funds held overseas in U.S. dollars?
A: Should be recognized on the balance sheet under Foreign Exchange gain as this represents income for the company.

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Q: The estimated future cost of restoring a mining site to its original condition?
A: Should be recognized in the financial statements of 2007 and therefore the restoration should be based on fair value because the restoration should be classified as a long lived Asset or a long term Asset. It is the company's legal obligation to reflect this restoration cost as a liability thus should also be capitalized.

Comment: Agreed the cost of restoration should be estimated and recorded, but it is a liability, not an asset. The term 'capitalize' tends to indicate asset, but this is not. The liability would only be recorded if the amount can be reasonably estimated.

Q: A non-revocable commitment to buy equipment in the following year?
A: I need assistance.

Comment: if no funds have been paid towards the commitment, then it is a commitment that is reported in the ...

Solution Summary

The solution comments on student responses to high-level questions about financial statement issues and reporting for a US company. Issues including mining restoration, irrevocable commitments, industrial trademarks, value of customer lists, and foreign exchange transactions.

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