Case 1: Claus Von Stroheim handcrafted antique furniture replicas, first as a retirement hobby, andlater in a shop to sell his products. His small shop became an immediate success, first with the
“snowbirds” and later with dealers, several of whom encouraged Claus to supplement his line of small
tables and bookcases with larger pieces. Toward this end, Claus worked in his workshop, after
closing the store in the off season and designed an impressive mahogany sideboard. He built two of
them by the time the shop reopened for the next season. Materials costs (for wood) amounted to
$700 for each; Claus’ labor, priced at the going wage rate was $500 for each. No overhead costs were
incurred.
Although familiar with the market for casual “antique” furnishings, Claus was uncertain about an
appropriate price for his sideboards. While reviewing catalogs offering pieces mass-produced from
cheaper woods, he concluded that a figure of $3,000 to $4,000 was about right for handcrafted
mahogany. Accordingly, he priced each sideboard at $3,000 (with a make offer sign attached to
each).
Within one week, Claus sold both sideboards for the full amount asked, no haggling. He sold the first
one on reopening day to Will Gaston, a dealer he knew well. “Beautiful work, Claus,” said Will. “I want
it, but I’m going to be short of cash for a while. How about $1,000 down and the balance in quarterly
installments for a year?” Done. Cash, a non-interest-bearing note, and the sideboard changed hands.
The second sale came two days later to Malcom Faust, Claus’ wood supplier since the hobby-only
days. Faust had dropped by to see if Claus needed any materials and was captivated by the
sideboard. “I don’t remember when I last had $3,000 in one lump,” said Malcolm, “and I don’t reckon
to have it anytime soon. But craftsmen like you always need wood. How about if I pay you in woodenough for mine and three others. Wood for sideboard, OK?” Claus agreed to the deal.
When his wife returned from a week of visiting relatives, Claus hastened to tell her the good news that
both sideboards had sold. “That’s great, Claus!” she said. “How much did we get for them?”
Required: List the specific standards according to the FASB Codification and detail the transaction
recording for each of the following questions.
1, Using the FARS database, find the applicable standard on how Claus should recognize the
sideboard sales and describe how he should record the transactions in his financial statements.
2. Using the FARS database, find the applicable standards on how each of the purchasers, Gaston
and Faust, should recognize the sideboard purchases and describe how each should record the
transactions in the financial statements.
Case 2: Magnet Mining Company has just completed the first year of operations at its new
strip mine, the Wicked Chicken. Magnet spent $10 million for the land and $20 million in
preparing the site for mining operations. The mine is expected to operate for 20 years.
Magnet is subject to environmental statutes requiring it to restore the The Wicked Chicken
site upon completion of mining operations.
Based on its experience and industry data, as well as current technology, Magnet forecasts
that restoration will cost about $10 million when it is undertaken. Of those costs, about $4
million is for restoring the “overburden” that was removed in preparing the site for mining
operations (prior to opening the mine); the rest is directly proportional to the depth of the
mine, which in turn is directly proportional to the amount of ore extracted.
Required: List the specific standards according to the FASB Codification and detail the
transaction recording for each of the following questions.
1. Should Magnet Mining Company recognize a liability for site restoration in conjunction with
the opening of the Wicked Chicken Mine? If so, what is the amount of that liability?
2. After Magnet has operated the Wicked Chicken Mine for 5 years, new technology is
introduced that reduces Magnet’s estimated future restoration costs to $7 million, $3 million of
which relates to restoring the overburden. How should Magnet account for this change in its
estimated future liability?
Case 3: In order to reduce its operating expenses, Compress Company decided to reduce
its staffing levels by 100 employees. It did this by offering early retirement incentives to
selected employees. However, having observed that similar programs at other companies
were very costly and lost more employees than anticipated, Compress was very stingy about
making an offer that would be too attractive.
Therefore, the company went with a “dutch auction” strategy that initially offered only limited
incentives with virtually no chance of attracting more than 100 employees. If the strategy
failed to attract the desire number of employees, it would design a slightly better subsequent
offering until the targeted number of employees was reached.
The company made the initial offer just before the company’s year-end. It stipulated that the
offer was a limited time offer to the first 100 employees accepting it and that it would expire in
30 days. It provided for a one-time payment of $10,000 to employees having 10 or more
years of service in exchange for their voluntary retirement. As of year-end (December 31), no
employees accepted the offer. Management believes that the odds are equal that 1, 2, . . .
99, or 100 employees will accept the offer.
Required: List the specific standards according to the FASB Codification and detail the
transaction recording for each of the following questions.
1. Should Compress recognize a liability for its offer of retirement incentives in its yearend financial statements? If so, what is the amount of that liability?
2. If, instead of making the offer to 100 employees, Compress made the offer to only one
employee and believes that the odds of acceptance or rejection are equal, should
Compress recognize a liability for that offer? If so, what is the amount of that liability?
Case 4: Communities United holds an annual lottery sweepstakes. This year the grand prize
is $1 million to the winning ticket holder. A total of 10,000 tickets have been printed and each
ticket will sell for $150 each.
The Sweepstakes has been a big money raiser for the charity and Communities United has
always been able to meet its sales target. However, if sufficient tickets are not sold to cover
the grand prize, the charity has reserved the right to cancel the Sweepstakes and issue
refunds to the ticket holders.
In recent years, a brisk secondary market for tickets has developed. This year, buying-selling
prices have varied between $75 and $95 before stabilizing at about $90.
When the tickets first went on sale this year, a local multibillionaire, Eckard Centric, wellknown in civic circles as a generous but sometimes eccentric donor, bought one of the tickets
from Communities United, paying $150 cash.
Required: List the specific standards according to the FASB Codification and detail the
transaction recording for each of the following questions.
1. Should Eckard Centric recognize his lottery ticket as an asset and, if so, at what
amount?
2. If the lottery tickets were nontransferable and no secondary market developed, should
Eckard Centric recognize the lottery ticket as an asset? If so, at what amount?
Case 5: Fantastic Designs Company owns what is referred to as the transparent office
building. The structure is made of glass walls and is largely unoccupied and most floors are
unfinished internally.
The building cost Fantastic $10 million to build and was the last building completed during the
downtown building boom in Big City USA. It is now 5 years old, with a carrying amount of $9
million.
The building is currently less than 30 percent occupied, but management believes its carrying
amount will be recovered over the remainder of the building’s expected 50-year life. Current
vacancy rates in Big City USA are such that there is a 15-year supply of equivalent vacant
space available in the area.
Required: List the specific standards according to the FASB Codification and detail the
transaction recording for each of the following questions.
1. Should the building that Fantastic owns be regarded as an “impaired asset” and its
carrying amount be written down? If so, to what amount should it be written down?
2. What additional factors would you like to understand before advising Fantastic, who is
now a client of your accounting firm, and what kind of value-added advice could you
provide them?
Case 6: As individuals fly for pleasure or business, they may earn frequent flyer miles that,
once enough miles are accumulated, can be redeemed for free trips. Rather than account for
these bonus miles as they accumulate, airlines typically book a liability only after enough
mileage has been accumulated to claim a free ticket. Thus, while experts estimate there are
25 billion miles of free travel resulting from frequent flyer programs, airlines have recognized
a liability for approximately only 30 percent, or 7.5 billion miles. The AICPA has argued that
with the availability of frequent flyer miles, the earnings process in no longer substantially
complete when an airplane ticket is sold. It maintains that a portion of the revenue from each
ticket should be deferred, as a “liability reserve,” and matched against future periods when
the bonus miles are redeemed.
Required: List the specific standards according to the FASB Codification and detail the
transaction recording for each of the following questions.
1. Do frequent flyer miles meet the definition of a liability?
2. If frequent flyer miles are a liability, can the liability be estimated at the time a ticket
is sold?
3. When should frequent flyer miles be recorded on the books of the airlines: (a) when
tickets are sold or (2) as bonus miles are redeemed?
4. If the traveler is flying for business purposes and the business ultimately earns the
frequent flyer miles, how should these be accounted for and reported?
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