Case 8-1 Norman Corporation

The value of a bond is found as the present value of interest payments plus

o Please see Exhibit 3. (b) $500 million of 12.5% 20 year subordinated debentures –

The company should report the change in the contingency accrual as a 2009 event due change in estimate. ASC 250-10-45-17 specifies that “a change in accounting estimate shall not be accounted for by restating or retrospectively adjusting amounts reported in financial statements of prior periods.” Additionally, ASC 450-20-25-7 indicates that “all estimated losses for loss contingencies shall be charged to income rather than charging some to income and others to retained earnings as prior period adjustments”.

25-7 If a loss cannot be accrued in the period when ti is probable that an asset had been impaired or a liability had been incurred because the amount of loss cannot be reasonable estimated, the loss shall be charged to the income of the period in which the loss can be reasonably estimated and shall not be charged retroactively to an earlier period. All estimated losses for loss contingencies shall be charged to income rather than charging some to income and others to retained earnings as prior period adjustments.”

Whether certain allocations of partnership income, gain, loss, deductions, and credits have substantial economic effect and whether that has any impact on the partners’ distributive shares.

7. Cost of compact discs (CDs) for newly recorded releases of Rush, Billy Joel, and Bryan Adams

The first option records the acquisition of Drug X and OuchX into an intangible account -- “ownership”. In the case of transfer ownership of the IPR&D of Drug X from Brust-a-Knee to Pharmers, Brust-a-Knee receives $2 million cash and incurred $2 million loss. The disadvantage of treating the $2 million loss into the expense account of Drug X is there may be future economic benefits for Brust-a-Knee to sell Drug X because the estimated revenue is $5.5

According to ASC 450-20-25-1, “When a loss contingency exists, the likelihood that the future event or events will confirm the loss or impairment of an asset or the incurrence of a liability can range from probable to remote. As indicated in the definition of contingency, the term loss is used for convenience to include many charges against income that are commonly referred to as expenses and others that are commonly

As per ASC 450-20-25-2, entities should accrue an estimated loss from a loss contingency by a charge to expense and a liability recorded only if both of the following conditions are met:

b. The amount of compensation earned and costs incurred under such contracts for each period for which an income statement is presented.”

(b) Losses from casualties or thefts (i) Trade, business, rental or royalty property (ii) Incomeproducing and employee

INVESTools should definitely capitalize these expenses. The practice of not capitalizing these expenses has led to routine recording of net losses

Considering real world practices, as well as in accordance with the conceptual framework from the textbook, accrual of a loss from ongoing litigation is rare. Companies usually do not record a loss until after the ultimate settlement has been reached. For example, the Las Vegas Sands Corporation, in a recent quarterly report, disclosed but did not accrue damages from a lawsuit it lost, even after the award was affirmed by the trial court, because the company believe that it has valid bases in law and fact to overturn or appeal the verdict. Consequently, M corporation should not accrue the contingency loss but continually disclose the matter even when a judgment was reached against the corporation to pay $18.5 million in 2009, given that the

6. Inclusion in advances to other technology companies of amounts that represented prepaid license fees: This overstates income net income, assets and retained earnings. This understates expenses on the income sheet.

A sinking fund reduces coupon rate because it provides a kind of future guarantee to bondholders. The company must make payments into the sinking fund or default so it must