Judgment Case 10–9
Requirement 1
The costs of research equipment used exclusively for Trouver would be
reported as research and development expenses in the period incurred.
The costs of research equipment used on both Trouver and future research
Requirement 2
a. Research and development costs usually are expensed in the period
b. This accounting treatment is justified by the high degree of uncertainty
Requirement 3
Corporate headquarters’ costs allocated to research and development would be
Requirement 4
Communication Case 10–10
Both views, expense and capitalize, can and often are convincingly defended.
The process of developing and synthesizing the arguments will likely be more
beneficial than just acceptance of the standard. Each student should benefit from
participating in the process, interacting first with his or her partner, and then
witnessing or participating in a debate on the issue. It is important that each
student actively participate in the process of arriving at a consensus argument.
Domination by one individual should be discouraged.
Arguments supporting the expense view should include the reasons cited by
the FASB in FASB ASC 730–10–05. Arguments supporting the capitalize view
should include reference to violations to the matching principle for successful
R&D projects.
Communication Case 10–11
Suggested Grading Concepts and Grading Scheme:
Content (70%)
_______ 20 Defines research and development according to FASB ASC
730.
future
revenues.
______
_______ 70 points
Writing (30%)
_______ 6 Terminology and tone appropriate to the audience of a
company president.
_______ 12 Organization permits ease of understanding.
______ Introduction that states purpose.
______ Paragraphs that separate main points.
Ethics Case 10–12
Requirement 1
If the equipment is to be used only in the single R&D project (as is likely) the
Requirement 2
Discussion should include these elements.
Ethical Dilemma:
Who is affected?
Alice
President and other managers
IFRS Case 10–13
Requirement 2
The following was taken from the company’s 2015 annual report. Your results
could differ if the company changes any of its policies in years after 2015.
NOTE 2 Summary of significant accounting policies and critical accounting
estimates:
Research and development costs – Costs of research activities are expensed as
incurred. Costs of development activities are capitalized when the recognition
criteria in IAS 38 are met. Capitalized development costs are stated at cost less
accumulated amortization and impairment losses with an amortization period of
generally three to ten years
The company expenses all research costs as incurred. Development costs are
capitalized if:
U.S. GAAP requires that both research and development expenditures be
expensed in the period incurred. The only exception is the capitalization of certain
computer software development costs.
Analysis Case 10–14
Requirement 1
The fixed-asset turnover ratio is computed by dividing net sales by average
fixed assets. A ratio of 8.97 for Pier 1 Imports indicates that they are able to
generate approximately $8.97 in net sales for each dollar invested in fixed assets
(property, plant, and equipment).
Requirement 2
($ in thousands)
Book value of PP&E, beginning of 2016 $214,048
Add: Purchases during 2016 51,813
Turnover ratio = Net sales ÷ Average PP&E
Judgment Case 10–15
Requirement 1
Elegant was not correct in its treatment of the software development costs.
Generally accepted accounting principles require companies to expense costs
Requirement 2
The amortization of capitalized computer software development costs begins
with the start of commercial production. The periodic amortization percentage is
Real World Case 10–16
Requirement 3
The following is based on Home Depot’s 2016 (year ended January 31, 2016)
financial statements. Answers will vary depending on the financial statement dates
chosen.
a. The company lists land, buildings, furniture, fixtures and equipment,
($ in millions)
Target Case
Requirement 1
In its balance sheet, Target lists property and equipment and other noncurrent
assets. Under the category of property and equipment, Target lists land, buildings
Requirement 2
The statement of cash flows reports that $1,438 million was spent in the year
Requirement 3
Generally retail merchandising companies like Target do not invest significant
amounts in research and development. Target attempts to sell products of other
companies rather than manufacture its own products for sale. Instead, retail
Requirement 4
The fixed-asset turnover ratio is computed by dividing net sales (revenues) by
average fixed assets. Using 2016 data, the ratio for Target is
($ in millions)
The ratio is intended to measure a company’s effectiveness in managing
Air France–KLM Case
Requirement 1
In Note 4.13, AF amortizes computer software development costs using the
straight-line method. The percentage used to amortize computer software
Requirement 2
Except for software development costs incurred after technological feasibility
has been established, U.S. GAAP requires all research and development
Requirement 3
Both U.S. GAAP and IFRS require that donated assets be valued at their fair
values. For government grants, though, the way that value is recorded is different
For grants related to assets, two alternatives are allowed:
1. Deduct the amount of the grant in determining the initial cost of the asset.
2. Record the grant as a liability, deferred income, in the balance sheet and