7.1 CAPITALIZATION VERSUS EXPENSING DECISION. When a firm incurs costs on an item to be used in operations, management must decide whether to treat the cost as an asset or an expense. Assume that a company used cash to acquire machinery expected to contribute to the generation of revenues over a three-year period and the com- pany erroneously expensed the cost to acquire the machine. a. Describe the effects on ROA of the error over the three-year period. b. Explain how the error would affect the statement of cash flows. 7.7- EARNINGS MANAGEMENT AND DEPRECIATION MEASURE- MENT. Earnings management entails managers using judgment and reporting estimates in such a way as to alter reported earnings to their favor. a. Discuss the three factors that must be estimated in measuring depreciation. b. Provide an illustration as to how each of these factors can be employed to manage earnings. 7.13- CHOICE OF A FUNCTIONAL CURRENCY Choosing the functional cur- rency is a key decision for translating the financial statements of foreign entities of U.S. firms into U.S. dollars. Qing Corporation, a U.S. firm that sells car batteries, formed a wholly owned subsidiary in Mexico to manufacture components needed in the production of the batteries. Approximately 50 percent of the subsidiarys sales are to Qing Corporation. The subsidiary also sells the components it manufactures to independent third parties, and these sales are denominated in Mexican pesos. Financing for the manufacturing plants in Mexico is denominated in U.S. dollars, but labor contracts are denominated in both dollars and pesos. All material contracts are denominated in Mexican pesos. Senior managers of 7.17- Bed and Breakfast (B&B) and Italian company operating in the Tuscany region, follows IFRS and has made the choice to remeasure long-lived assets as fair value. B&B purchased land in 2009 for 150,000. At the end of the next four years, the land is worth 160,00 in 2009, 155,000 in the 2010, 140,000 in 2011, and 145,000 in 2012. a. Describe how the B&B will reflect the change in the lands value in each of its annual financial statements. b. Assume that the asset was a building with a ten year remaining useful life as of the end of 2009. After writing the building upward 160,00, how much should B&B charge to depreciation expense in 2009? CASE 7.2 DISNEY ACQUISITION OF MARVEL ENTERTAINMENT In September 2009, The Walt Disney Company announced that it would acquire Marvel Entertainment in a $4 billion cash and common stock deal. On a per-share basis, the con- sideration given by Disney to Marvel shareholders represents a 29 percent premium over Marvels share price at the date of acquisition. Disney acquires the more than 5,000 characters in Marvels library, including Iron Man, Spider-Man, X-Men, Captain America, and the Fantastic Four. Exhibit 7.41 presents the Condensed Consolidated Balance Sheet of Marvel at the end of its June 30, 2009 second quarter