In: Accounting
Indicate if each of the following items would be recognized in TelCan Ltd.’s financial statements for 20X3 and, if so, what elements would be recognized. For any items that would not be recognized, explain the reason for nonrecognition.
1. TelCan issued a purchase order to buy inventory early in the following year.
2. TelCan’s share price has decreased from $50 to $45 on the stock exchange.
3. The month of December has passed, and tenants occupying space in TelCan’s building have not yet paid the rent. TelCan’s rental agent believes that payment is reasonably assured.
4. TelCan sold the right to use its international industrial trademark to a Taiwanese computer manufacturer for the next five years.
5. TelCan experienced decreases in the value of cash deposits held in U.S. dollars because of a stronger Canadian dollar.
6. TelCan invested in employee training costs to improve the company’s future productivity.
7. TelCan’s major competitor has liquidated and gone out of business. The company has purchased the competitor’s customer list.
8. TelCan has a reasonably reliable estimate of the future cost of reaching a settlement on a pending patent infringement lawsuit.
1.
The commitment is an executory contract. There will be no elements recognized until the inventory has been delivered or payment (full or partial) has been made, whichever happens first.
2.
No financial statement element has been created. The decreased value of the shares impacts the shareholders directly, not TelCan as a corporation.
3.
Rent revenue and rent receivable are recognized because the services were rendered and measurable under the terms of the lease, and collection is probable.
4.
The minimum sales value received from (or commited to by) the buyer is recognized as an asset, either cash or receivable, unearned revenue should be recognized as revenue annually over the five years of the contract. If the sales price is variable, such as depending on the level of the Taiwanese company’s sales volume, any additional revenue above the guaranteed or minimum amount should be recognized only year-by-year, not estimated and included in the amount of the asset.
5.
Changes in value of foreign currency are recognized on the income statement as a gain (or loss) and on the balance sheet as an increase (or decrease) in an asset (cash).
6.
Training costs should have a future value, but the future benefit cannot be measured. Therefore, training costs are recognized as an expense in the financial statements. There is no reliable measure of the value of the “asset”.
7.
The cost of acquiring the competitor’s customer list should be recognized as an intangible asset (subject to periodic impairment tests, as explained later in the book).
8.
If TelCan can reliably estimate the cost of settling the law suit, that amount should be recognized as a liability and an expense or loss (with full note disclosure), subject to revisions in future periods as necessary.
1. The commitment is an executory contract.
2. No financial statement element has been created.