Codification & Research Measurement Issues

Codification & Research Measurement Issues

Using the Codification to

Research Measurement

Issues

Now you Try 7.7.

1. Explain the role of the allowance for credit losses. Does this directly reduce the reported?

value of an entity’s receivables?

2. Should the allowance be determined on an individual asset or on a pool basis? Explain.

3. What are some of the methods that an entity may use to measure its allowance for credit

losses?

4. Over what period (time horizon) should expected losses for an asset be considered?

Now you try 7.8

1. How frequently should entities remeasure the allowance for credit losses?

2. Describe the journal entry that would be required to increase an existing allowance account

balance, and cite the paragraph supporting your response.

3. What is a write-off of a financial asset, and how does the accounting for this event differ from

the accounting for an allowance account adjustment?

Now consider this scenario. Assume a company maintains an accounts receivable aging schedule

and historical data showing that, on average, 7% of its receivables that are 1-30 days past

due will not be collected. The company believes the economy has improved relative to its historical

information and that it should reduce this expected loss rate by 5%.

4. Using the preceding excerpts from ASC 326-20, comment on whether a reduction to the

company’s expected loss percentage may be appropriate.

Exercise

Respond to the following using guidance in the Codification. Cite your sources for all responses.

3. When should an investor, applying the “equity method” of accounting for an investment, recognize equity

method income-in the period the investee reports earnings, or in the period the investee declares a dividend?

4. Is measurement guidance (in Sections 30 or 35 of the applicable topic) available regarding employer obligations

for compensated employee absences (such as vacation accruals)? If not, think: Where else might a researcher

look for such measurement guidance within this topic?

12. Under Topic 835-20 (Capitalization of Interest), what amount of interest may initially be capitalized as part of

the initial investment in an asset, for certain qualifying assets? How should a company determine its “capitalization

rate” for capitalizing interest?

13. a. What is a valuation allowance as this term relates to income tax accounting?

b. What guidance within ASC 740-10 requires that entities consider applying a valuation allowance to

deferred tax assets?

c. What are some considerations relevant in determining whether a valuation allowance is required?

Case Study

Cheese Ahead Frankie’s Homemade Cheese Shop (“Frankie’s”) signed an advertising agreement with Simmons

Boards (“Owner”) for billboard advertising rights along Route 33 in the town of Hampton. Frankie’s has the right

to select and display advertising copy on billboard panels numbered IO and 12 (panel numbers correspond to designated

billboard locations) for a 3-year period from Jan. I, 20X I, to Dec. 31 , 20X3. In consideration for these rights,

Frankie’s agrees to pay $10,000 in year 1, $12,000 in year 2, and $13,000 in year 3. Assume that Frankie’s is required

to pay the annual fee on Jan. I of each contract year. Assuming Frankie’s incremental borrowing rate is 5%, what are

the entries Frankie should record at inception of the contract, then at the end of years 1, 2, and 3?