Chapter 5 Exercises3. Locate FASB Concepts Statement No. 6, Elements of Financial Statements (CON 6). a. What is the definition of “expenses” in CON 6? Also, cite the paragraph source. b. Describe where you would go within CON 6 to find the definition of liabilities versus where you would go to find more detailed guidance for applying this definition. How would a beginning researcher know to look for this application guidance? Using CON 6, act as though you are coaching a peer on how to navigate this guidance4. Using CON 5, answer the following: What is recognition? 5. Using CON 5, answer the following: What is the purpose of the statements of earnings and comprehensive income? Provide the excerpted guidance that responds to this question, then also summarize the guidance using your own words. 6. Summarize the four fundamental recognition criteria identified in CON 5. Cite the paragraph source for this information. Following these four recognition criteria are several paragraphs that elaborate upon the criteria. What are the paragraph numbers that elaborate upon these four criteria? 7. Using CON 7, answer the following: What is the objective of present value when used in accounting measurements at initial recognition? 8. How is CON 8 currently organized? What new chapter was most recently added to CON 8, and what is the purpose of this chapter20. Circle each of the required elements shown in the following source citation. Then describe each of the required elements that was appropriately included in this reference. Per FASB Statement No. 5, Accounting for Contingencies (FAS 5), par. 8: “An estimated loss from a loss contingency (as defined in paragraph 1) shall be accrued by a charge to income if both of the following conditions are met5.2. Variable Rents—A Liability? Assume a company pays $10,000 per month plus 2% of sales (“a variable rent charge”) to occupy a retail space in a mall. The lease agreement has a 3-year noncancelable term. Based on prior history in that location, the company estimates that its variable rent charge will amount to approximately $1,000 per month. a. Using the Conceptual Framework evaluate whether this variable rent change meets the definition of a liability. b. Next, locate discussion in the Basis for Conclusions of ASU 2016-02 (Leases) and describe how the FASB considered this issue of whether variable rents should be included in the lease liability recognized by companies. Describe some of the history of this issue—did the Board always hold the view that variable rents should/should not be included in companies’ lease obligations?5.3. Rail Grinding Rail grinding is a maintenance activity conducted on railroad tracks that is designed to remove irregularities and imperfections from the track in order to allow for faster travel speeds on the track and to increase the lifespan of tracks. a. Using the Conceptual Framework evaluate whether the cost of rail grinding activities should be capitalized as an asset or reported as an expense. b. Using SEC.gov, company filings, full text search, look for disclosures from companies in the industry to benchmark how the industry treats these costs. c. Also using SEC.gov, search for CORRESP between the SEC and BNSF railroad. Describe the SEC’s position on this issue5.5 Improving Your Familiarity with CON 7 Present Value Techniques As noted within the chapter, CON 7 describes techniques for calculating present value, including the following illustration of the expected cash flow approach, reproduced from CON 7. This example illustrates how the expected cash flow approach can be used to assign prob-ability factors to the likelihood of receiving a $1,000 cash flow in any of three possible future yearsPresent value of $1,000 in 1 year at 5% $952.38Probability 10.00% $ 95.24Present value of $1,000 in 2 years at 5.25% $902.73Probability 60.00% 541.64Present value of $1,000 in 3 years at 5.50% $851.61Probability 30.00% 255.48Expected present value $892.36a. Review the guidance in CON 7 and, in your own words, explain in approximately one paragraph the difference between the traditional (best estimate) and expected present value techniques for measuring fair value. b. Assume that you are a lender determining the present value of this sample receivable illustrated in CON 7. Under the traditional approach, what would the present value of that receivable be?c. Show the math that would be necessary to add a fourth scenario: collection of the $1,000 in 5 years at 6%, with a probability of 10%. (No need for a calculator, just write out how you would compute this scenario). d. Which approach would you expect users of the lender’s financial statements to prefer, and why
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