We must determine how to record the payment to the bank that is based on the play’s success. The 5% interest that is payable as well as an accrual based on expected future revenue could be expensed. Alternatively, just the 5% interest amount could be expensed because the remaining balance that would have to be paid is uncertain and difficult to determine. The latter approach seems more reasonable. The commitment will have to be clearly disclosed. Expenditure recognition In general, the financial statements for the organization might look like one of the following: All expenditures are expensed as incurred, and large initial deficits are recorded, followed by large profits if the play is a success Many expenditures are capitalized as assets, and recognized as expenses in the same period as revenues. Cash flow is better portrayed by alternative 1, and this alternative reflects the high risk of the project. Results of operations might be better reflected by alternative 2. The situation should be reviewed to see if the requirements for internally developed intangibles apply, and, if so, if the stage play in rehearsal qualifies as something governed by contractual rights (ownership of the script and production rights). In any event, capitalization is dependent on the assessment of the likelihood that the play will have probable future economic benefit, and be profitable in the future. If the likelihood is not high, then alternative 1 will be followed; otherwise, #2 is appropriate. Salaries and fees for rehearsal The expenditure can be recognized in either the current year or future years. Arguments can be made for either treatment. There is no certainty of the play succeeding and uncertain future benefit therefore the amount should be expensed in the current period. On the other hand, the amounts do relate to production in future years, and create an asset which is future potential revenue. Costumes and sets The costumes and sets can be expensed either in 20x4 or in future periods. An argument is the amount should be expensed immediately because there is uncertainty about the play’s success. However, the costumes and sets do relate to production in future years. Capitalizing the amount and recording depreciation in future years is justifiable. Miscellaneous costs Costs of administration and promotion should be expensed as incurred because there is no separately identifiable intangible asset that is created as a result.
We must determine how to record the payment to the bank that is based on the play’s success. The 5% interest that is payable as well as an accrual based on expected future revenue could be expensed. Alternatively, just the 5% interest amount could be expensed because the remaining balance that would have to be paid is uncertain and difficult to determine. The latter approach seems more reasonable. The commitment will have to be clearly disclosed. Expenditure recognition In general, the financial statements for the organization might look like one of the following: All expenditures are expensed as incurred, and large initial deficits are recorded, followed by large profits if the play is a success Many expenditures are capitalized as assets, and recognized as expenses in the same period as revenues. Cash flow is better portrayed by alternative 1, and this alternative reflects the high risk of the project. Results of operations might be better reflected by alternative 2. The situation should be reviewed to see if the requirements for internally developed intangibles apply, and, if so, if the stage play in rehearsal qualifies as something governed by contractual rights (ownership of the script and production rights). In any event, capitalization is dependent on the assessment of the likelihood that the play will have probable future economic benefit, and be profitable in the future. If the likelihood is not high, then alternative 1 will be followed; otherwise, #2 is appropriate. Salaries and fees for rehearsal The expenditure can be recognized in either the current year or future years. Arguments can be made for either treatment. There is no certainty of the play succeeding and uncertain future benefit therefore the amount should be expensed in the current period. On the other hand, the amounts do relate to production in future years, and create an asset which is future potential revenue. Costumes and sets The costumes and sets can be expensed either in 20x4 or in future periods. An argument is the amount should be expensed immediately because there is uncertainty about the play’s success. However, the costumes and sets do relate to production in future years. Capitalizing the amount and recording depreciation in future years is justifiable. Miscellaneous costs Costs of administration and promotion should be expensed as incurred because there is no separately identifiable intangible asset that is created as a result.
FA2_Ch9_text_solutions.docx