1Intermediate Financial Accounting II ProjectWinter 2017FASB Codification Research & Analysis of A Scenario (40 points)Access the FASBs Codification Research System throughhttp://aaahq.org/ascLogin.cfm and type in the following user ID and password:User ID: AAA52069 and Password: F98tTDrRead the following information carefully1.BACKGROUND INFORMATIONFrosty Co. is a publicly traded, medium-sized manufacturing firm that produces refrigerators,freezers, ice makers, and snow cone machines. During the past three years, the company hasstruggled against increasing competition, sluggish sales, and a public relations scandalsurrounding the departure of the former Chief Executive Officer (CEO) and Chief FinancialOfficer (CFO). The new CEO, Jane Mileton, and CFO, Doug Steindart, have worked hard toimprove the company's image and financial position. After several difficult years, the companynow seems to be resolving its difficulties, and the management team is considering newinvestment opportunities. The team hopes that diversification into a line of professional icecream makers, and perhaps a line of consumer products, will help the company continue itsrecent growth and effectively compete with future competitors.In order to raise the funds needed for these new investments, Frosty Co.'s Board of Directors hasapproved a seasoned equity offering (SEO). The discussions regarding the new investmentopportunities and the equity offering have been kept quiet until a positive set of financialstatements can provide strong evidence that the company has turned around, leading to anincrease in the company's stock price.INTRODUCTIONAfter a full week of carefully examining financial statements, Simon was exhausted. He hadbecome Frosty Co.'s corporate controller only a month ago, after several years as an auditor at apublic accounting firm, and was excited about the move to corporate accounting. The first fewweeks had gone well, as Simon met his accounting staff and settled into his new responsibilities.Then, he had started reviewing Frosty Co.'s financial statements for the prior year to make surethey correctly followed GAAP, and to familiarize himself more with the company and industry.Unfortunately, his relative inexperience with the industry and Frosty's accounting procedures hadrequired him to spend more time on the review than he had anticipated.He still had a few questions about the financial statements, but he needed to start preparing forthe upcoming SEO. He decided that he would talk to his staff about his lingering questions1 Excerpt from Porter, J. C. 2012. How adjusting entries affect the quality of financial reporting: The case of FrostyCo. Issues in Accounting Education 27(2): 70-88. 2tomorrow morning, just before his meeting with the CEO and CFO. The three of them were todiscuss the upcoming audit and the earnings announcement and how they would impact theproposed SEO. He rubbed his tired eyes and headed home to get a little sleep.MEETING OF THE ACCOUNTING STAFF: 10:30AMSimon looked up as the divisional controllers, Elsa Pilebody and John Mortenson, came into hisoffice. Elsa worked with Frosty Co.'s fridge and freezer division; John worked with the icemaker and snow cone machine division. So far, Simon had enjoyed working with them,especially since neither of them seemed to resent him stepping in as their new boss. They wereboth smiling as they came through the door, and their good-natured teasing started almost beforethey had finished shaking hands.Sorry we're a little late, Elsa started, but John had to stop for the last jelly donut.I did not! John said indignantly. He looked at Simon. It was chocolate.Because of his busy schedule that day, Simon got down to business instead of joining the banteras he normally would have done. Thanks for coming by, Elsa and John. We have several issuesto discuss before I have to meet with Jane and Doug this afternoon. He paused for a second.I've spent the past week going over the financial statements. Overall, they look well done, but Ineed clarification on a few details. To start with, I want to discuss the construction project webegan last year.That's our big project at the moment. We're building a new factory that should be done nextsummer, Elsa said. Construction is going well, and we've been careful to capitalize all of theexpenditures.Simon shook his head. That's the problem. I think we capitalized more than we should have.More specifically, it looks like we capitalized all of the interest on our most recent bank loan.We did, Elsa replied. Since we're using all of the loan proceeds to build the new factory, wefelt it was appropriate to capitalize all of the interest. John nodded in agreement.I disagree, said Simon. Here's a breakdown of the payments we made on our new buildingand a list of our outstanding long-term debt (see tables below). Did we take out any of theseloans specifically for the new factory?Elsa shook her head. No, we took out the new loan, Loan 2, for general expansion, then decidedthe most appropriate use of the funds would be for the new factory.Simon frowned. Why are we capitalizing the interest on Loan 2 if it wasn't originatedspecifically for the new factory?Well, if the capital from the loan is eventually used on a specific construction project, then Ithink we should be able to capitalize the interest on that loan as part of the historical cost of the 3project. Of course, Elsa frowned, maybe we are capitalizing too much. Perhaps we need tocalculate avoidable interest to determine the amount of interest that should be capitalized.You are right that generally we would need to calculate avoidable interest before capitalizingany interest, Simon answered. But in this case, we don't need to do that. I believe GAAPallows interest to be capitalized only if a specific construction loan is used.Well, I still think that we should be able to capitalize at least some of the interest. But I'll dosome research to make sure.Date Expenditure Spent The Amount of ExpenditureFebruary 15 $90,000April 1 $125,000June 30 $200,000October 1 $300,000November 15 $585,000Liabilities Amount Annual Interest RateBond A $678,000 7.1%Loan 1 $650,000 6%Loan 2 $1,000,000 7%Answer the following questions based on the information above:Capitalizing interest on the new factory:1) During the year, Frosty Co. paid all of the interest accrued on Bond A and Loan 1, but only$50,000 of the interest accrued on Loan 2. Using one journal entry, summarize how Frostyoriginally recorded the accrued interest on all three long-term debts.2) Assuming John and Elsa are right that the new loan meets the standards for capitalizinginterest, calculate avoidable interest.3) What correcting entries would need to be made to properly record interest on Frosty Co.'sconstruction project if John and Elsa are right?4) What would be the effect of interest adjustments on net income, assuming that Frosty Co.sincome tax rate is 30 percent?5) Obtain the relevant authoritative literature on accounting interest capitalization using theFASBs Codification Research System. How would you help Simon, John and Elsa todissolve their disagreement? In other words, whose argument was right? Please make sureto cite FASB Accounting Standard Codification to support your answer. Be specific aboutthe citation number you cite from (e.g., FASB ASC 735-10-25-1).