Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281



Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem

Researching GAAP


The Tenth National Bank had taken possession of a shopping mall in foreclosure of a mortgage. When the mall was inspected prior to being sold by the bank to a real estate company, it was discovered that it had extensive asbestos problems. An estimate indicated that it would cost $1 million to remove the asbestos. The bank has also purchased an office building for its headquarters. The building was inspected before the purchase and a similar asbestos problem was discovered. An estimate indicated that it would cost $2 million to remove the asbestos, and the bank completed the purchase. The bank’s president has asked you how to account for these transactions.


  1. 1. Research the related generally accepted accounting principles and prepare a short memo to the president that answers her question. Cite your references and applicable paragraph numbers.
  2. 2. Does this situation create ethical issues?


To determine

Research the “generally accepted accounting principles” and prepare s short memo to the president.


Generally Accepted Accounting Principles (GAAP): These are the guidelines necessary to create accounting principles for the implementation of financial information reporting.

Prepare a memo:





The president,

TN Bank

Re:  “Related generally accepted accounting principles” and the accounting of the costs”.

I have researched the issue regarding the method of how to account for the costs of removing the asbestos from the two buildings. As per FASB’s “statement of financial accounting concepts No.6, par.25 and 26”, assets are the potential future economic benefits attained or measured by a specific entity due to past events or transactions. Also, asset comprises the ability to contribute directly or indirectly to the cash flows (future).

Initially, I will deal with the office building which was purchased with a known asbestos problem. The cost incurred ($2 million) for removing the asbestos is considered as a required cost to make the building prepared for its intended use. It is discussed that the cost of $2 million indirectly contributes for the future cash flows because the building cannot be used without its cost. Both of these arguments anticipate that the selling price is decreased, since the estimated cost of removing asbestos is known. Thus, I prefer that $2 million must be capitalized to the buildings’ cost.

It is to be noted that the $2 million is the cost of “maintenance” that do not extend the useful life or improvise the physical arrangement beyond the state in which it was initially intended to be used. Therefore, the cost could be expensed according this argument.

The second issue is regarding the shopping mall wherein, the asbestos problem was not identified at the time the building was purchased. The following alternatives may be taken into consideration.

  1. 1. The “part of the $1 million” associated to “normal” replacement of the affected portions of the building must be “capitalized” and any “special” costs incurred because of the asbestos problem must be “expensed”...


To determine

Explain whether this situation creates ethical issues.

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