CASE 91 Donated Assets

The City of Martinsville donated land to Essex Company. The fair value of the land was $100,000. The land had cost the city $45,000.

Required:

1. Describe the current accounting treatment for the land. Include in your answer the amount at which the land would be valued by Essex Company and any other income statement or balance sheet effect.
2. Under the recommendations outlined in SFAS No. 116 (see FASB ASC 720), the FASB required that donated assets be recorded at fair value and that revenue be recognized equivalent to the amount recorded for a donation.
   1. Defend the FASBs position. In your answer, refer to the conceptual framework.
   2. Criticize the FASBs position. In your answer, refer to the conceptual framework.
3. Assume that immediately before the donation, Essex had assets totaling $800,000 and liabilities totaling $350,000. Compare the financial statement effects of the FASB requirement with previous practice. For example, how would EPS or ratios such as debt to equity be affected?