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Intermediate Accounting: Reporting...

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

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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NBC paid $401 million for the rights to televise the 1992 Summer Olympic Games, and it was widely reported that it had a loss of more than $60 million. CBS purchased the rights to the 1992 and 1994 Winter Olympic Games for a combined $543 million. CBS reported a $322 million pretax loss on its baseball and football contracts in 1991.

Required:

  1. 1. Under what conditions, if any, should NBC and CBS have written down the value of their assets?
  2. 2. Does this situation allow opportunities for earnings management?

1.

To determine

Explain the conditions under which company N and Company C should have been written down the value of their assets.

Explanation

Intangible assets: These are the long-term assets which are not physical in nature, but possess value. The intangible assets would be amortized over their definite useful life or limited useful life, and those with indefinite or unlimited lives are not amortized.

Explain the conditions under which company N and Company C should have been written down the value of their assets as follows:

Company N and Company C has two alternatives to report their assets, they are,

A. Company N and company C can continue to report the value of intangible assets (at cost) until the event has occurred and could report the profit or loss for the given period. The profit or loss would be the difference between the advertising revenue and the expenses for creating that event. This approach has the advantage to produce the reliable information because this approach is fully based on the event, and amount that have been occurred for conducting the sport event. This approach may be appropriate for the single event like Olympics, but it would be difficult to estimate the advertising revenue when the advertising sale has occurred prior to the event...

2.

To determine

Explain whether the give situation allows the opportunities for earnings management.

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