Question

PLEASE RESPOND USING THE FASB CODE TO HELP BACK UP YOUR ANSWERS.

1. You are the chief financial officer for a mid-sized, manufacturing company. You often advise management on accounting and financial matters because they have very little background in these areas. You are trusted and have a reputation for “doing your homework” before responding to executive’s questions. You have found that this approach is successful both in responding accurately and confidently to management and in instructing your staff on the proper accounting treatment for and reporting of various business transactions.

Respond to management for the scenarios below. Be sure to reflect your “homework” using the Accounting Standards Codification and business acumen and reflect these in your response. Submit your work on Schoology by the due date.

1. Your company has recently closed a $10 million loan with a bank to fund construction of a new factory building next to the old one. The CEO just returned from lunch with Joe, the CEO of a competitor. Your CEO enters your office and says: “Joe just told me that his financial guys report interest payments on debt in the investing section of the statement of cash flows.” That sounds pretty good to me. Let me know if we can do that too. As you know, free cash flow is a key statistic assessed by investors and creditors.

2. The CEO has been working with CEO Joe, from a competing company, on a joint venture to develop a new product that both companies will manufacture when the joint venture is dissolved. The structure of the joint venture is 50/50 ownership of the JV’s stock and 50/50 profit/loss sharing. It is intended to be a collaboration of equals. The CEO says, “Now for my main question.” He continues, “Joe thinks we should reflect the JV on each of our books using a simple cost approach, since we each have the same amount of influence on the JV.” “I am not as knowledgeable about this stuff as he is, but I like his approach. It’s easy to understand. It’s like one of our subsidiaries that we account for at cost on the interim basis before it gets consolidated at year end. Okay, I know that you like to think things over before your respond. I’ll stop by tomorrow before lunch for your answer. I have lunch with Joe again tomorrow.”

Answer 1

Answer A) According to FASB Cash flow relating to interest payment on debt incurred for purchasing a Property (in current case New factory building) prior to date of purchase or acquisition of property or on the date of acquisition are to be shown as an Cash flow from investing activity. Interest relating to prior period of acquisition is Capitalised thus it is shown as an Financing activity item. In the given Case Interest pertaining to the period prior to construction period will be Shown as an investing activity.

But any payment of interest after the date of acquisition or construction of the property is to be shown as Cash flow from Financing Activity.

Answer B) According to FASB it is necessary for an joint venture to follow equity method.According to Equity method person investing in joint venture clearly knows its Profit or Loss in the ventures.It enables the investors in taking decision relating to operation or investment in the joint venture according to its share in the stock of joint venture.

In equity method Accounting is done of the joint venture and whatever is the result, profit or loss is transferred to investors according to his holding in joint venture.The Share of the investor is then consolidated in their respective account books.

Therefore according to FASB it is necessary to prepare separate books of joint venture.Thus joes approach to reflect JV in individual books will not be appropriate.