The FASB has made definitions of various financial statement elements. However, in practice, it is sometimes not
Question:
The FASB has made definitions of various financial statement elements. However, in practice, it is sometimes not obvious whether something meets the definition of an element or not. For each of the following, comment on how the item should be classified.
A. A company has sold a special kind of stock for $1,000 per share to some shareholders. Unlike most stock, this “Class X” stock has certain special rights. If the company goes out of business, the Class X shareholders are entitled to $1,000 each before other shareholders get paid. The Class X shareholders are also entitled to dividends of $50 per share every year. Also, in 20 years, the company has promised to buy back the Class X shares at $1,000 each. Are these shares equity, or liabilities?
B. A company sold bonds to the public, promising to pay interest of 4%
every year, and to buy back the bonds in 1,000 years. Is this a liability, or a sale of equity?
C. A company’s normal business is selling clothing. It also, from time to time, buys and sells stock. Over the last 10 years, the income from sale of stock has amounted to 10% of total income. Should the income from sales of stock be considered a gain, or a revenue? At what level of activity would your answer change?
D. A company’s normal business is selling food in restaurants. It has hundreds of restaurants around the world. It has made a decision to restructure its business, and change its way of operating. This will involve substantial costs. Are these costs expenses, or losses?
E. A company spends money on research to be used to make a new product. The company thinks there is a 10% chance the new product will be successful. Should the research expenditures be considered assets, or expenses? At what level of probability might your answer change?
Step by Step Answer:
Introductory Accounting A Measurement Approach For Managers
ISBN: 9781138956216
1st Edition
Authors: Daniel P. Tinkelman