Suggestions for Class Activities
1. Guest Speaker
The assigning of fair value to assets acquired in an acquisition is an interesting topic for students.
The accounting issues are interesting, as are the valuation issues.
Through your contacts at local CPA firms, preferably one of the Big 4 firms, arrange for a set of
speakers to address these issues. If possible, organize a visit of one manager/partner in the audit
area and one in the valuation services area. The auditor can speak about the accounting issues
and can provide an update as to the FASB/SEC activity in this area. The valuation services
person can go through the valuation techniques they use to assign values to all of the items
acquired in a purchase. Students are very interested in these topics, particularly the valuation
issues. It is a wonderful opportunity to open their minds to the many different types of services
accounting firms provide to their clients. It is interesting to note that the Big 4 firms have ceased
providing acquisition valuation services to their firm’s audit clients. Due to the independence
issue, Sarbanes-Oxley, and SEC scrutiny, they now provide these services only to audit clients of
other accounting firms.
2. Research Activity
At the end of its 2015 fiscal year, Toro Company, the lawn mower company, reported
approximately $225 million in property, plant, and equipment and another $315 million in
intangible assets in its balance sheet.
Suggestions:
Have the class access Toro’s financial statements for the fiscal year ended October 31, 2015,
using EDGAR at www.sec.gov. Ask students to answer the following questions:
1. What types of assets does Toro include under the property, plant, and equipment
classification?
2. What types of assets does Toro include as intangibles?
3. What was the company’s fixed-asset turnover ratio for 2015?
4. How much did Toro report as research and development expense in 2015?
Points to Note:
Students will need to access the disclosure notes and other parts of the 10-K to answer the
majority of these questions. For example, in 2015, Toro reported $73.6 million in engineering
and research expense. However, this was not reported on the face of the income statement but in
Item 1 in the 10-K.
3. Target Analysis
Have students, individually or in groups, go to the most recent Target annual report using
EDGAR at www.sec.gov. Ask them to:
1. Compare the net amount of property and equipment with that in the 2016 financial
statements included in Appendix B of the text. What is happening to the company’s asset
base? Is the company expanding its operations?
2. Compute the fixed-asset turnover ratio for the current year and compare your result with
the 2016 ratio. Has the ratio changed significantly, and if so, what are the possible
implications?
4. Professional Skills Development Activities
The following are suggested assignments from the end-of-chapter material that will help your
students develop their communication, research, analysis, and judgment skills.
Communication Skills. In addition to Communication Case 10–11, Judgment Case 10–8 can
be adapted to ask students to write a memo from a junior accountant to a controller
answering each of the questions. Communication Case 10–10 and Ethics Case 10–12 do
well as group assignments. Problem 10–11, Real World Case 10–6, and Ethics Case 10–12
create good class discussions. Judgment Case 10–4, Research Case 10–5, and Analysis
Case 10–14 are suitable for student presentation(s).
Research Skills. In their careers, our graduates will be required to locate and extract relevant
information from available resource material to determine the correct accounting practice,
perhaps identifying the appropriate authoritative literature to support a decision. Research
Case 10–2 and Exercises 10–22 and 10–23 provide excellent opportunities to help students
develop this skill. In addition, Judgment Case 10–15 can be adapted to require students to
research the authoritative literature on accounting for computer software development
costs.
Analysis Skills. The “Broaden Your Perspective” section includes Analysis Cases that direct
students to gather, assemble, organize, process, or interpret data to provide options for
making business and investment decisions. In addition to Analysis Case 10–14, Real World
Case 10–16 also provides opportunities to develop and sharpen analytical skills.
Judgment Skills. The “Broaden Your Perspective” section includes Judgment Cases that
require students to critically analyze issues to apply concepts learned to business situations
in order to evaluate options for decision making and provide an appropriate conclusion. In
addition to Judgment Cases 10–1, 10–3, 10–4, 10–7, 10–8, 10–9, and 10–15,
Communication Case 10–11 also requires students to exercise judgment.
CPA Simulation. Students can test their knowledge of the concepts discussed in this chapter
and at the same time practice critical professional skills necessary for career success and
preparation for the computer-based CPA Exam. The simulation for this chapter, Yamashita
Corporation, tests students’ knowledge of accounting for interest capitalization. Access the
simulations in the Connect library.
5. Ethical Dilemma
The chapter contains the following ethical dilemma:
ETHICAL DILEMMA
Grandma’s Cookie Company purchased a factory building. The company controller, Don
Nelson, is in the process of allocating the lump-sum purchase price between land and building.
Don suggests to the company’s chief financial officer, Judith Prince, that they fudge a little by
allocating a disproportionately higher share of the price to land. Don reasons that this will
reduce depreciation expense, boost income, increase their profit-sharing bonus, and hopefully,
increase the price of the company’s stock. Judith has some reservations about this because the
higher reported income will also cause income taxes to be higher than they would be if a
correct allocation of the purchase price is made.
What are the ethical issues? What stakeholders’ interests are in conflict?
You may wish to discuss this in class. If so, discussion should include these elements.
Step 1—The Facts:
Grandma’s Cookie Company has purchased a factory building. The controller, Don Nelson,
suggests that the company allocate a higher share of the purchase price to land, permitting lower
depreciation, higher net income, and higher profit-sharing bonuses in future years. The CFO,
Judith Prince, has reservations, as higher net income will result in higher income taxes in the
future. Generally accepted accounting principles require the lump-sum acquisition price to be
allocated among the items in proportion to the assets’ relative market values.
Step 2—The Ethical Issue and the Stakeholders:
The ethical issue or dilemma is whether the controller’s obligation to his employer to increase
net income is greater than his obligation to provide information that is not misleading to users of
the financial statements, including the tax authorities.
Stakeholders include Don Nelson, controller; Judith Prince, CFO; other recipients of the
profit-sharing plan; government entities; current and future creditors; and current and future
investors.
Step 3—Values:
Values include competence, honesty, integrity, objectivity, loyalty to the company, loyalty to
other managers, and responsibility to users of the financial statements.
Step 4—Alternatives:
1. Record the land at a proportionately higher value than the building.
2. Record the allocation of the purchase price between the land and the building based upon
the current relative market values.
Step 5—Evaluation of Alternatives in Terms of Values:
1. Alternative 1 illustrates loyalty to placing the Cookie Company in a favorable financial
position.
2. Alternative 2 reflects values of competence, honesty, integrity, objectivity, and
responsibility to users of the financial statements.
Step 6—Consequences:
Alternative 1
Positive consequences: Future net income will be increased, profit-sharing plan members will
benefit, the price of the company’s stock will increase, investors will experience higher returns
on their investments, and taxing authorities will receive more tax revenue.
Negative consequences: Users of the financial statements, including taxing authorities, would
be misinformed regarding the specific value of the land and building and future net income. The
company will be paying higher taxes. If top management detects the manipulation, both the
controller and the CFO may lose their jobs.
Alternative 2
Positive consequences: Users of financial statements, including taxing authorities, would
receive net income figures according to GAAP. The controller and CFO would maintain their
integrity. The company would pay the correct amount of taxes and would save cash due to the
lower taxes paid.
Negative consequences: The controller and CFO may incur the disfavor of higher
management and lose their jobs. The price of the company’s stock may not rise, and profit
sharing may not be as lucrative as with Alternative 1.
Step 7—Decision:
Student(s) must decide their course of action.
Assignment Chart
Learning Est.
time
Questions Objective(s) Topic
(min.)
10–1 1 Long-lived assets; tangible versus intangible 5
10–2 1 Cost of long-lived assets 5
10–3 1 Cost of a natural resource 5
10–4 1,8 Intangible assets; purchased versus developed 5
10–5 1 Goodwill 5
10–6 2 Lump-sum purchase 5
10–7 3 Acquisition in exchange for a note 5
10–8 4 Acquisition in exchange for equity securities 5
10–9 4 Acquisition through donation 5
10–10 6 Acquisition through donation 5
10–11 6 Nonmonetary exchange 5
10–12 6 Nonmonetary exchange 5
10–13 7 Interest capitalization 5
10–14 7 Interest capitalization 5
10–15 7 Interest capitalization 5
10–16 8 Research and development 5
10–17 8 Research and development 5
10–18 8 Software development costs 5
10–19 8 Developed technology versus in-process R&D 5
10–20 9 IFRS; government grants 5
10–21 9 IFRS; research and development 5
10–22 9 IFRS; software development costs 5
10–23 A Oil and gas accounting (based on Appendix) 5
Brief Learning Est.
time
Exercises Objective(s) Topic
(min.)
10–1 1 Acquisition cost; machine 5
10–2 1 Acquisition cost; land and building 5
10–3 2 Lump-sum acquisition 10
10–4 1 Cost of a natural resource; asset retirement
obligation
10
10–5 1 Asset retirement obligation 10
10–6 1 Goodwill 5
10–7 3 Acquisition cost; noninterest-bearing note 10
10–8 4 Acquisition cost; issuance of equity securities 5
10–9 5 Fixed-asset turnover ratio 5
10–10 5 Fixed-asset turnover ratio; solving for unknown 5
10–11 6 Nonmonetary exchange 10
10–12 6 Nonmonetary exchange 10
10–13 6 Nonmonetary exchange 10
10–14 7 Interest capitalization 10
10–15 7 Interest capitalization 10
10–16 8 Research and development 10
10–17 8 Software development costs 10
10–18 8 Research and development; various types 10
10–19 8 Start-up costs 10
Learning Est.
time
Exercises Objective(s) Topic
(min.)
10–1 1 Acquisition costs; land and building 10
10–2 1 Acquisition cost; equipment 10
10–3 1,2 Acquisition costs; lump-sum acquisition 20
10–4 1 Cost of a natural resource; asset retirement
obligation
15
10–5 1 Intangibles 10
10–6 1 Goodwill 10
10–7 1 Goodwill 10
10–8 2 Lump-sum acquisition 10
10–9 3 Acquisition cost; noninterest-bearing note 15
10–10 1,3 Acquisition costs; noninterest-bearing note 20
10–11 4,9 IFRS; acquisition cost; issuance of equity
securities and donation
10
10–12 9 IFRS; acquisition cost; acquisition by donation;
government grant
10
10–13 5 Fixed-asset turnover ratio; Nvidia 10
10–14 6 Nonmonetary exchange 10
10–15 6 Nonmonetary exchange 10
10–16 6 Nonmonetary exchange 10
10–17 6 Nonmonetary exchange 10
10–18 6 Nonmonetary exchange 15
10–19 1,3,4,6 Acquisition cost; multiple methods 25
10–20 6 FASB codification research 15
10–21 1,6,7,8 FASB codification research 15
10–22 7 Interest capitalization 15
10–23 7 Interest capitalization 15
10–24 7 Interest capitalization 15
10–25 7 Interest capitalization; multiple periods 20
10–26 8 Research and development 15
10–27 8 Research and development 15
10–28 8,9 IFRS; research and development 15
10–29 9 IFRS; research and development 15
10–30 1,4,6,7 Concepts; terminology 20
10–31 8 Software development costs 20
10–32 8 Software development costs 20
10–33 1,8 Intangibles; start-up costs 15
10–34 A Full-cost and successful efforts methods
compared (based on Appendix)
20
Learning Est.
time
Problems Objective(s) Topic
(min.)
10–1 1,2,3,4 Acquisition costs 30
10–2 1,2,7 Acquisition costs; land and building 20
10–3 1,4,6 Acquisition costs 30
10–4 1,8 Intangibles 25
10–5 1,3,6,8 Acquisition costs; journal entries 25
10–6 6 Nonmonetary exchange 25
10–7 6 Nonmonetary exchange 25
10–8 6 Nonmonetary exchange 25
10–9 7 Interest capitalization; specific interest method 40
10–10 7 Interest capitalization; weighted-average method 40
10–11 8 Research and development 20
10–12 1,2,3,7 Acquisition costs; lump-sum acquisition;
noninterest-bearing note; interest capitalization
40
Star Problems
Learning Est.
time
Cases Objective(s) Topic
(min.)
Judgment Case 10–1 1,3,6 Acquisition costs 20
Research Case 10–2 1 FASB codification; locate and extract relevant
information and cite authoritative support for a
financial reporting issue; restoration costs; asset
retirement obligation
50
Judgment Case 10–3 7 Self-constructed assets 20
Judgment Case 10–4 7 Interest capitalization 30
Research Case 10–5 1 Goodwill 45
Real World Case 10–6 1 Property, plant, and equipment; Norfolk Southern
Corporation
25
Judgment Case 10–7 1 Goodwill 15
Judgment Case 10–8 8 Research and development 20
Judgment Case 10–9 8 Research and development 20
Communication Case 10–10 8 Research and development 25
Communication Case 10–11 8 Research and development 50
Ethics Case 10–12 8 Research and development 20
IFRS Case 10–13 8,9 Research and development; comparison of U.S.
GAAP and IFRS; Siemens AG
35
Analysis Case 10–14 5 Fixed-asset turnover ratio; Pier 1 Imports, Inc. 60
Judgment Case 10–15 8 Computer software costs 15
Real World Case 10–16 1,7 Property, plant, and equipment; Home Depot 45
Target Case 1,5 Reporting property, plant, and equipment and
intangible assets; Target
15
Air France–KLM Case 9 IFRS; software development costs; research and
development; Air France–KLM
15