Financial Accounting
Spring 2022
Compulsory Assignment
INSTRUCTIONS:
Hand-out: March 21st, 2022, 12:00 am; hand-in: March 28th, 2022, 12:00 am.
Side 1 af 7
Financial Accounting
Spring 2022
Compulsory Assignment
ASSIGNMENT 1
Company Tromle has acquired a new building for $800,000. Assume the building is for the
company’s own use. In the acquisition process, it has incurred incidental costs in total of
$20,000, which includes legal fees: $4,000; real estate agent's fees: $5,000; and architect’s
fees: $11,000. Management believes that these costs should be expensed because they have
not increased the value of the building and, if the building was immediately resold, these
amounts would not be recouped. In other words, the fair value of the building is considered
to still be $800,000.
Question 1.1
Explain and demonstrate how Company Tromle should account for the building
(and these costs) initially and subsequently in the financial statements. Please
briefly discuss the differences between the cost model and revaluation model
based on this case.
Company Tromle also constructed a building for use by its administration section. The completion date was 1 July 2007, and the construction cost was $840,000. The company expected
to remain in the building for the next 20 years, at which time the building would probably
have no real salvage value and have to be demolished. It is expected that demolition costs
will amount to $15,000. In December 2013, following some severe weather in the city, the
roof of the administration building was considered to be in poor shape, so the company decided to replace it. On 1 July 2014, a new roof was installed at a cost of $220,000. The new
roof was of a different material to the old roof, which was estimated to have cost only
$140,000 in the original construction, although at the time of construction it was thought that
the roof would last for the 20 years that the company expected to use the building. Because
the company had spent the money replacing the roof, it thought that it would delay construction of a new building, thereby extending the original life of the building from 20 years to 25
years.
Question 1.2
Explain and demonstrate how Company Tromle should account for the building
and the replacement of the roof (and how it affects the depreciation) from 1 July
2014 onwards. Please consider: 1) the roof is not considered to be a separate part
of the building; 2) the roof is considered a separate part of the building. Your answer should be substantiated.
Side 2 af 7
Financial Accounting
Spring 2022
Compulsory Assignment
ASSIGNMENT 2
Company ABC has three cash-generating units, Curry Division, Thompson Division and Durant
Division. The head office is in the city, and the infrastructure for the divisions is located outside the city center. Because of the potential for the company to have problems of an environmental nature or in relation to social justice, particularly with its mix of employees, Company ABC has recently established a social responsibility center (SRC), which interacts with
the divisions, generating information and statistics for the production of a triple-bottom-line
social responsibility report.
On 30 June 2017, the accounts relating to each of the divisions as well as the headquarters
section and the SRC were as follows:
Curry
Thompson
Durant
Head Office
SRC
Division
Division
Division
Land
120,000
140,000
80,000
10,000
5,000
Plant and equipment
420,000
310,000
270,000
40,000
15,000
Accumulated depreciation
(120,000)
(100,000)
(80,000)
(5,000)
(4,000)
Inventories
150,000
110,000
100,000
0
0
Account receivable
90,000
80,000
50,000
0
0
Liabilities
60,000
50,000
50,000
0
0
Company ABC believes that the corporation’s headquarters supplies approximately
equal service to the three divisions, and an immaterial amount to the SRC. Because the
SRC has been established only recently, it is not possible at this stage to allocate the
assets of the SRC to the three divisions. Economic indicators suggest that the company’s
assets may have been impaired, so management has determined the value in use of
each of the divisions — the head office and the SRC do not generate cash inflows. The
recoverable amount of the three divisions were calculated to be:
Curry Division
Thompson Division
Durant Division
720,000
500,000
400,000
Side 3 af 7
Financial Accounting
Spring 2022
Compulsory Assignment
Question 2.1
Explain and demonstrate how Company ABC should account for any impairment
loss to the entity (Your answers must be substantiated and indicate journal entries
if necessary).
Side 4 af 7
Financial Accounting
Spring 2022
Compulsory Assignment
ASSIGNMENT 3
A technology company sells a complex computer program. It promises customers that it will
provide updates and virus protection for three years from date of sale. The company recognizes 80% of the proceeds of selling the program as revenue, and regards the remaining 20%
as an obligation to be extinguished over three years.
The company tentatively plans to report its obligation to service its product as deferred revenue on the balance sheet, recognizing one-third of the obligation as revenue each year, on
grounds that this produces the best matching of costs and revenues. However, it consults you
before finalizing its policy.
You point out that accounting standards are now primarily based on a measurement approach, and that matching of costs and revenues is not consistent with this approach. Instead,
you recommend that the liability be measured at the amount the firm would rationally pay to
be relieved of the obligation.
Question 3.1
How is the 20% of proceeds allocated to the service obligation viewed under historical cost accounting? How would the obligation be viewed under a measurement approach?
Question 3.2
Suggest one or more ways to determine the amount the firm would rationally pay
to be relieved of the obligation.
Question 3.3
Compare the relevance and reliability of your suggested approach(es) with the
matching approach of writing the obligation off over three years.
Side 5 af 7
Financial Accounting
Spring 2022
Compulsory Assignment
ASSIGNMENT 4
Whalen Corporation is a manufacturer of iron water works and outdoor sanitation products. Assume its cash flows depend significantly on the weather. The company operates
under ideal conditions of uncertainty. On January 1, 2018, Whalen Corporation acquired
a special plant to be used in its operations. The plant will last two years, at which time
its salvage value will be zero. Whalen Corporation financed the purchase of the plant by
issuing common shares.
In 2018, net cash flows will be $200 if the weather is dry and $700 if the weather is
rainy. In 2019, cash flows will be $300 if the weather is dry and $900 if the weather is
rainy. Cash flows are received at year-end. In each year, the probability that the weather
is rainy is 0.3 and 0.7 that it is dry. The interest rate in the economy is 6% in both years.
Whalen Corporation also pays a dividend of $50 to its shareholders at the end of 2018.
Question 4.1
Based on the given information, assume the weather is rainy in 2018. Prepare a
balance sheet as at the end of 2018 and an income statement for 2018. Please
demonstrate your calculations.
Question 4.2
If we apply the present value model under uncertainty to the more realistic conditions (i.e., in the real world where accountants operate), please evaluate the
reliability of the expected present value calculations and explain your reasoning.
Now assume Whalen Corporation’s CEO suggests that the company should measure its income as the change in the market value of Whalen Corporation’s shares over the period (adjusted for capital transactions). Furthermore, the CEO thinks that measuring the income in
this way would avoid problems for fair-value individual assets and liabilities, particularly intangible assets (e.g., goodwill).
Question 4.3
Please discuss whether the measurement approach suggested by Whalen Corporation’s CEO provides new information to what the market already knows about
Whalen Corporation. Your answer should be substantiated.
Assume that measuring income as the change in Whalen Corporation’s shares value is equivalent to fair-valuing all its assets and liabilities, including self-developed intangibles. As we
know, standard setters are attempting to extend fair value accounting to additional assets
Side 6 af 7
Financial Accounting
Spring 2022
Compulsory Assignment
and liabilities. However, there are some other practitioners questioning how far fair value
accounting can be extended while still providing useful information to investors.
Question 4.4
Please evaluate the decision usefulness of fair-valuing all assets and liabilities. In
addition, please also evaluate the decision usefulness of valuing certain assets
(e.g., self-developed intangibles) at value in use.
Side 7 af 7