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Intermediate Accounting
17th Edition

Donald E. Kies o PhD, CPA

Northern Illinois University
DeKalb, Illinois

J erry J. W eygandt PhD, CPA

University of Wisconsin—Madison
Madison, Wisconsin

Terry D. Warfiel d, PhD

University of Wisconsin—Madison
Madison, Wisconsin
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copyright © 1953, 1956, 1966, 1968, 1969, 1970, 1971, 1972, 1973, 1974, 1975, 1976, 1977, 1978, 1979, 1980, 1981,
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This book contains citations from various FASB pronouncements. Copyright © by Financial Accounting Stand-
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10 9 8 7 6 5 4 3 2 1
 Brief Contents
1 Financial Accounting and Accounting 16 
Dilutive Securities and Earnings
Standards  1-1 per Share   16-1

2 Conceptual Framework for Financial 17 Investments  17-1

Reporting  2-1
18 Revenue Recognition   18-1
3 The Accounting Information System   3-1
19 Accounting for Income Taxes   19-1
4 
Income Statement and Related
20 
Accounting for Pensions and Postretirement
Information  4-1
Benefits  20-1
5 
Balance Sheet and Statement of Cash
21 Accounting for Leases   21-1
Flows  5-1
22 
Accounting Changes and Error
6 
Accounting and the Time Value of Money   6-1
Analysis  22-1
7 Cash and Receivables   7-1
23 Statement of Cash Flows   23-1
8 
Valuation of Inventories: A Cost-Basis
24 Full Disclosure in Financial Reporting   24-1
Approach  8-1

9 
Inventories: Additional Valuation Issues   9-1 A p p e ndix A Private Company Accounting   A-1
10 
Acquisition and Disposition of Property, A p p e ndix B  pecimen Financial Statements:
S
Plant, and Equipment   10-1 The Procter & Gamble
Company  B-1
11 
Depreciation, Impairments, and
Depletion  11-1 A p p e ndix C  pecimen Financial Statements:
S
The Coca-Cola Company  C-1
12 Intangible Assets   12-1
A p p e ndix D  pecimen Financial Statements:
S
13 Current Liabilities and Contingencies   13-1
PepsiCo, Inc.  D-1
14 Long-Term Liabilities   14-1
A p p e ndix E  pecimen Financial Statements:
S
15 Stockholders’ Equity   15-1 Marks and Spencer plc  E-1

v
From the Authors
Through many editions, this text has continued to reflect the constant changes taking place
in the GAAP environment. This edition continues this tradition, which has become even
more significant as the financial reporting environment is exploding with major change. Here
are three areas of major importance that are now incorporated extensively into this edition
of the text.

Convergence of GAAP and IFRS One of the most important innovations shaping
our capital markets was the idea of GAAP. It might be said that it would be even better if
we had one common set of accounting rules for the whole world, which
“If this text helps you ­appreciate the challenges, would make it easier for international investors to compare the financial
worth, and ­limitations of financial reporting, results of companies from different countries. Fortunately, GAAP and
if it ­encourages you to evaluate critically and international accounting standards have converged to result in a number
­understand financial ­accounting ­concepts and of common standards between GAAP and International Financial
practice, and if it p­repares you for advanced study, Reporting Standards (IFRS). And you have the chance to be on the
professional examinations, and the successful ground floor as we develop for you the similarities and differences in the
and ethical pursuit of your career in accounting or two systems that ultimately will be one.
business in a global economy, then we will have
attained our objectives.” A Fair Value Movement The FASB believes that fair value
information is more relevant to users than historical cost. As a result,
there is more information that is being reported on this basis, and even more will occur in
the future. The financial press is full of articles discussing how financial institutions must
fair value their assets, which has led to massive losses during the financial crisis. In addition,
additional insight into the reliability related to fair values is being addressed and disclosed
to help investors make important capital allocation decisions. We devote a considerable
amount of material that discusses and illustrates fair value concepts in this edition, including
its relevance to three major accounting standards updates: revenue, leases, and financial
instruments.

A New Way of Looking at Generally Accepted Accounting

Principles (GAAP) Learning GAAP used to be a daunting task, as it is comprised of
many standards that vary in form, completeness, and ­structure. Fortunately, the profession
has developed the Financial Accounting Standards Board Codification (often referred to as
the Codification). This Codification provides in one place all the GAAP related to a given
topic. This textbook is the first to incorporate this Codification—it will make learning GAAP
easier and more interesting!

Intermediate Accounting is the market-leading text in providing the tools needed to understand what
GAAP is and how it is applied in practice. With this Seventeenth Edition, we strive to continue to
provide the material needed to understand this subject area. The text is comprehensive and up-to-date.
We also include proven pedagogical tools, designed to help you learn more effectively and to answer
the changing needs of this course.

We are excited about Intermediate Accounting, Seventeenth Edition. We believe it meets an im-
portant objective of providing useful information to educators and students interested in learn-
ing about both GAAP and IFRS. Suggestions and comments from users of this text will be
appreciated. Please feel free to e-mail any one of us.

Donald E. Kieso Jerry J. Weygandt Terry D. Warfield

Somonauk, Illinois Madison, Wisconsin Madison, Wisconsin

vi

Don Kieso
Donald E. Kieso, PhD, CPA, received
his bachelor’s degree from Aurora University
and his doctorate in accounting from the Uni-
versity of Illinois. He has served as ­chairman
of the Department of Accountancy and is cur-
rently the KPMG Emeritus Professor of Ac-
countancy at Northern Illinois University. He
has public accounting experience with Price
Waterhouse & Co. (San Francisco and Chicago)
and Arthur Andersen & Co. (Chicago) and re-
search experience with the Research Division
of the American Institute of Certified Public
Accountants (New York). He has done post-
doctorate work as a Visiting Scholar at the Uni-
versity of California at Berkeley and is a recip-
ient of NIU’s Teaching Excellence Award and
four Golden Apple Teaching Awards. Professor
Kieso is the author of other accounting and
business books and is a member of the American
Accounting Association, the American Insti-
tute of Certified Public Accountants, and the
Illinois CPA Society. He has served as a mem-
ber of the Board of Directors of the Illinois CPA
Society, then AACSB’s Accounting Accredita-
tion Committees, the State of Illinois Comptrol-
ler’s Commission, as Secretary-Treasurer of the
Federation of Schools of Accountancy, and as
Secretary-Treasurer of the American Account-
ing Association. Professor Kieso is ­currently
­serving on the Board of Trustees and Executive
Committee of Aurora University, as a member
of the Board of Directors of Kishwaukee Com-
munity Hospital, and as Treasurer and Director
of Valley West Community Hospital. From 1989
to 1993, he served as a charter member of the
National Accounting Education Change Com-
mission. He is the recipient of the Outstanding
Accounting Educator Award from the Illinois
CPA Society, the FSA’s Joseph A. Silvoso Award
of Merit, the NIU Foundation’s Humanitarian
Award for Service to Higher Education, a Dis-
tinguished Service Award from the Illinois CPA
Society, and in 2003 an honorary doctorate from
Aurora University.
About the Authors
Jerry Weygandt
Jerry J. Weygandt, PhD, CPA, is the
Arthur Andersen Alumni Emeritus Professor
of Accounting at the University of Wisconsin—
Madison. He holds a Ph.D. in accounting from
the University of Illinois. Articles by Professor
Weygandt have appeared in the Accounting
Review, Journal of Accounting Research, Account-
ing Horizons, Journal of Accountancy, and other
academic and professional j­ournals. These
articles have examined such financial report-
ing issues as accounting for price-level adjust-
ments, pensions, convertible securities, stock
option contracts, and interim reports. Professor
Weygandt is author of other accounting and
financial reporting books and is a member of
the American Accounting Association, the
American Institute of Certified Public Account-
ants, and the Wisconsin Society of Certified
Public Accountants. He has served on numer-
ous committees of the American Accounting
Association and as a member of the editorial
board of the Accounting Review; he also has
served as President and Secretary-Treasurer
of the American Accounting Association. In
addition, he has been actively involved with
the American Institute of Certified Public
Accountants and has been a member of the
Accounting Standards Executive Committee
(AcSEC) of that organization. He has served
on the FASB task force that examined the re-
porting issues related to accounting for income
taxes and served as a trustee of the Financial
Accounting Foundation. Professor Weygandt
has received the Chancellor’s Award for Excel-
lence in Teaching and the Beta Gamma Sigma
Dean’s Teaching Award. He is on the board of
directors of M & I Bank of Southern Wisconsin.
He is the recipient of the Wisconsin Institute of
CPA’s Outstanding Educator’s Award and the
Lifetime Achievement Award. In 2001, he re-
ceived the American Accounting Association’s
Outstanding Educator Award.
Terry Warfield
Terry D. Warfield, PhD, is the PwC
Professor in Accounting at the University of
Wisconsin—Madison. He received a B.S. and
M.B.A. from Indiana University and a Ph.D. in
accounting from the University of Iowa. Pro-
fessor Warfield’s area of expertise is financial
reporting, and prior to his academic career, he
worked for five years in the banking industry.
He served as the Academic Accounting Fellow
in the Office of the Chief Accountant at the
U.S. Securities and Exchange Commission in
Washington, D.C. from 1995–1996. Professor
Warfield’s primary research interests concern
financial accounting standards and disclosure
policies. He has published scholarly articles in
The Accounting Review, Journal of Accounting
and Economics, Research in Accounting Regu-
lation, and Accounting Horizons, and he has
served on the editorial boards of The Account-
ing Review, Accounting Horizons, and Issues in
Accounting Education. He has served as presi-
dent of the Financial Accounting and Report-
ing Section, the Financial Accounting Standards
Committee of the American Accounting Asso-
ciation (Chair 1995–1996), and on the AAA-FASB
Research Conference Committee. He also
served on the Financial Accounting Standards
Advisory Council of the Financial Accounting
Standards Board and as a trustee of the Finan-
cial Accounting Foundation. Professor Warfield
has received teaching awards at both the Uni-
versity of Iowa and the University of Wisconsin,
and he was named to the Teaching Academy at
the University of Wisconsin in 1995. Professor
Warfield has developed and published sev-
eral case studies based on his research for use
in accounting classes. These cases have been
­selected for the AICPA Professor-Practitioner
Case Development Program and have been
published in Issues in Accounting Education.
New to This Edition
Content Changes by Chapter
Chapter 1: F
 inancial Accounting and Accounting
Standards
• Generally updated for content and recent developments.
Chapter 2: Conceptual Framework for Financial Reporting
• New footnote detailing most recent FASB updates related
to disclosures.
• Completely updated IFRS Insights section for the most
recent information concerning the IASB and FASB con-
ceptual statements.
Chapter 3: The Accounting Information System
• New section on the chart of accounts, as well as increased
explanation and graphics of the recording process.
• Updated opening story on economic crime to reflect latest
data and trends.
• New “What Do the Numbers Mean?” (WDNM) box on
blockchain.
• New Analytics in Action activity on collecting financial
data from a variety of sources.
Chapter 4: Income Statement and Related Information
• New WDNM box on how and why companies use earn-
ings management to misrepresent company performance.
• Updated information about joint FASB-IASB project on
financial statement presentation (currently on hold).
• Updated Evolving Issue box on most recent information
concerning non-GAAP reporting.
Chapter 5: Balance Sheet and Statement of Cash Flows
• Rewrote “Additional Information” section for most recent
FASB updates and recommendations on note disclosures
regarding accounting policies, contractual situations,
contingencies, and fair value.
• New Analytics in Action activity on ratio analysis for
companies in the Dow Jones average.
Chapter 6: Accounting and the Time Value of Money
• New Analytics in Action activity on analyzing business alter-
natives, with consideration of time value of money concepts.
Chapter 7: Cash and Receivables
• New opening story, discussing current effect of the
Tax Cuts and Jobs Act of 2017 in terms of amounts of
­company cash parked overseas.
• New Evolving Issue, on what companies should include
as part of cash and cash equivalents on the balance sheet,
such as cryptocurrencies.
• Updated discussion of allowance method for uncollect-
ible accounts per latest FASB standards (i.e., net amount
expected to be collected instead of net realizable value).
viii
• New Analytics in Action activity on estimating the allow-
ance for doubtful accounts and conducting financial anal-
ysis of the collectibility of accounts receivable.
Chapter 8: Valuation of Inventories: A Cost-Basis Approach
• Generally updated for content and recent developments.
Chapter 9: Inventories: Additional Valuation Issues
• New WDNM boxes on (1) corporate barter to handle
problem inventory and (2) importance of identifying
markdown method (cost versus retail) used by retailers.
• New Analytics in Action activity on analyzing inventory
balances for possible impairment.
Chapter 10: Acquisition and Disposition of Property,
Plant, and Equipment
• M
 oved contributions discussion as a new appendix, ex-
panding its discussion per recent FASB guidance.
• New WDNM box on importance for companies to effec-
tively manage capital spending.
Chapter 11: Depreciation, Impairments, and Depletion
• Updated opening story on technical and environmental
issues affecting recognition of impaired assets.
• Updated footnote 15 to include the financial impacts of
the most recent legislation, Tax Cuts and Jobs Act of 2017.
• New WDNM box on how changes in tax depreciation
rules related to bonus depreciation.
• New Analytics in Action activity on analyzing company
information related to depreciation and impairment of
property, plant, and equipment.
Chapter 12: Intangible Assets
• Updated discussion of goodwill impairment test per recent
FASB.
• New WDNM box on how goodwill impairments reported
by companies can signal their future cash flows.
• New Analytics in Action activity on analyzing goodwill
for companies in the Dow Jones average.
Chapter 13: Current Liabilities and Contingencies
• New WDNM boxes on (1) advantages of increased em-
ployee benefits over wage growth and (2) how Penn
Central Railroad provides example of need for rules for
liabilities expected to be refinanced.
• Updated Refinancing Criteria section for short-term obli-
gations expected to be refinanced due to latest proposed
FASB Accounting Standards Update.
• New Analytics in Action activity on analyzing current
liabilities as part of a valid analysis of liquidity.
• New case illustration on determining whether a lawsuit
liability should be recognized.

Chapter 14: Long-Term Liabilities
• New WDNM box on why some companies are issuing
100-year and even longer-duration bonds.
Chapter 15: Stockholders’ Equity
• Generally updated for content and recent developments.
• New Analytics in Action activity on analyzing ROE using
the DuPont method.
Chapter 16: Dilutive Securities and Earnings per
Share
• New discussion and illustrations on stock compensation
costs.
Chapter 17: Investments
• New opening story on how new FASB standard on re-
porting loans at amortized cost and equity investments
at fair value is resulting in wins for banks and losses for
companies.
• Updated discussion of impairments for receivables, avail-
able-for-sale and held-to-maturity debt investments, and
equity investments.
• D
 eleted dated WDNM box on disclosure of equity invest-
ments.
Chapter 18: Revenue Recognition
• Generally updated for content and recent developments.
Chapter 19: Accounting for Income Taxes
• Chapter updated throughout to reflect the Tax Cuts and
Jobs Act of 2017, including a new opening story that dis-
cusses its most important provisions.
• Loss carrybacks now discussed in a new Appendix 19B.
• New WDNM box on impact of a lower corporate tax
rate.
Improved Digital Assets
Intermediate Accounting is completely integrated with Wiley-
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access the content and resources needed to master the material.
Features of the WileyPLUS course include the following:
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  N ew to Th is Editi on ix
Chapter 20: Accounting for Pensions and
Postretirement Benefits
• M
 oved up last part of the continuing pension expense work-
sheet example earlier in the chapter, for improved continuity.
• Completely updated section on the reporting and disclosure
requirements for pensions, now discussed in four categories:
(1) assets and liabilities, (2) net income, (3) comprehensive
income, and (4) notes to the financial statements.
Chapter 21: Accounting for Leases
• Chapter consists of Updated Chapter 21 available with
Kieso 16e.
• Opening story updated per most recent information on im-
pact of new lease standard on companies’ balance sheets.
Chapter 22: Accounting Changes and Error Analysis
• New WDNM box on how substantial depreciation-related
changes might affect financial information.
• Completely updated discussion of converting to the equity
method in Appendix 22A, given the recent FASB standard.
Chapter 23: Statement of Cash Flows
• Expanded WDNM boxes to include recent FASB rule for
classifying operating cash flows.
Chapter 24: Full Disclosure in Financial Reporting
• New discussion of FASB Disclosure Framework project
on improving the effectiveness of disclosures in financial
statements, which has resulted in a new concepts state-
ment in August 2018.
• New discussion of recent controversy regarding “short-
termism” of interim reporting.
• M
 oved “Errors, Fraud, and Illegal Acts” section later in
chapter under “Fraudulent Reporting” for improved pre-
sentation of topics.
a­ nalytics skills that students will need in their future
accounting ­careers. Intermediate Accounting also in-
cludes a “Data ­Analytics and Accounting” module within
WileyPLUS that contains seven interactive lessons with
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• NEW
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• A
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WileyPLUS course, we have also improved the lecture
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Proven Pedagogical Framework
This edition continues to provide numerous key learning aids to help you master the text
material and prepare you for a ­successful career in accounting.
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21-2 CH A PT E R 2 1 Accounting for Leases

CHAPTER 21
when they leased rather than purchased. Presented below are the lease percentages for major
U.S. airlines in a recent year.

The Phantom Fleets: Number of Aircraft and

Percent Carried Off the Balance Sheet

44%
American
© andersphoto/Shutterstock
13%
Delta

Accounting for Leases Southwest

UAL
29%
29%

Fleet under
operating
leases
94%
Spirit Fleet owned

L E A R N I N G O BJ E CT I V E S
Number of planes: 100 400 600 800 1,000
After studying this chapter, you should be able to: Source: Company reports.

1. Describe the environment related to leasing 3. Explain the accounting for operating leases.
transactions. 4. Discuss the accounting and reporting for special
The same held true for many other industries as well. What was this favorable accounting
2. Explain the accounting for finance leases. features of lease arrangements.
treatment? The previous FASB standard on leasing depended on whether a lease qualified as an
operating lease or a finance lease. In an operating lease, companies did not report an asset on
their balance sheet for the item they leased, nor did they report a related liability for their lease
obligation. Only if the company had a finance lease would companies have to report an asset
and a related liability on the balance sheet. However, the FASB has recently issued a standard
on leasing that mandates that all companies will have to report both assets and related liabili-
PREVIEW OF CHAPTER 21 The following opening story indicates the increased This chapter also includes ties for practically all lease arrangements.
significance and prevalence of lease arrangements. As a result, the need for uniform numerous conceptual and The accounting change will have significant impact on many companies’ balance sheets.
accounting and informative reporting of these transactions has intensified. In this chapter, global discussions that are The top 1,000 U.S. public companies alone have nearly $1 trillion in operating lease liabilities.
we look at the accounting issues related to leasing. The content and organization of this integral to the topics Companies with large off-balance-sheet operating leases will be most affected. For example,
presented here. here is a list of companies that will have to capitalize a significant number of operating leases.
chapter are as follows.

ACCOU N TIN G FOR LEASES Balance Sheet Impact

Assets and Liabilities Increases (in millions)
Walgreens Boots Alliance $32,811 FedEx $17,874
The Leasing Finance Leases Operating Leases Special Lease CVS Health 27,151 United Continental Holdings 16,251
Environment • Lessee accounting and • Lessee accounting Accounting Problems AT&T 25,928 Delta Air Lines 16,236
• Lessees finance lease example • Lessor accounting • Residual values Amazon 22,848 Walmart 15,366
• Lessor accounting Verizon Communications 20,734 Bank of America 14,500
• Lessee lease advantages • Other lease adjustments
• Lessors • Sales-type lease example • Bargain purchase options
So Sir David Tweedie, what we can now say is get ready as your wish is about to come true.
• Lessor lease advantages • Short-term leases
• Conceptual nature of a • Presentation, disclosure,
lease and analysis Sources: Adapted from Seth Lubore and Elizabeth MacDonald, “Debt? Who, Me?” Forbes (February 18, 2002),
• Finance and operating p. 56; A. Catanach and E. Ketz, “Still Searching for the ’Rite’ Stuff,” Grumpy Old Accountants (April 30, 2012),
leases http://blogs.smeal.psu.edu; “Who Is Most Impacted by the New Lease Accounting Standards? An Analysis of the
• Lease classification Fortune 500’s Leasing Obligations,” Lease Accelerator (2016); and Sue Lloyd, “A New Lease on Life,” Investor
Perspective (January 2016).

Times Are A-Changing Review and Practice

Sir David Tweedie, a former IFRS chairperson, is known for making the following observa- Go to the Review and Practice section at the end of the chapter for a targeted summary review
tion about airline accounting. He noted that one day he would like to fly on an airplane that and practice problem with solution. Multiple-choice questions with annotated solutions as well
appears on a company’s balance sheet. What Sir David was referring to is that many of the as additional exercises and practice problem with solutions are also available online.
airlines such as United, Delta, and Southwest sometimes do not own their aircraft. The
airlines lease many of their airplanes due to the favorable accounting treatment they received

21-1

Review and Practice

Chapter Opener Vignettes The Review and Practice section, placed after the
The Chapter Opener Vignettes provide an text discussion, offers students the opportunity
engaging introduction as well as place the to assess their understanding of the chapter’s
content of the chapter’s topics in context topics before tackling homework ­assignments.
in terms of recent accounting, economic,
and political developments.

Chapter Preview
The Chapter Preview summarizes the major
­issues discussed in the chapter, and provides
students with a visual outline of the key topics.

x
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  P r oven P edagogical Framework xi

21-10 C H A PTE R 21 Accounting for Leases
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Research and Development Costs 12-19

NEW
 ORE Illustration
M intangible assets other than
Variable
ILLUSTRATION 21.3
Leasegoodwill.
Payments
INCLUDING VARIABLE LEASE PAYMENTS
If goodwill is present, companies should report it separately.
Facts: On January 1, 2020, Jose Company leases an airplane for 6 years. The annual lease payments are

Walk-Throughs
The FASB concluded that since goodwill and other intangible
$1,000,000 assets
per year, differatsignifi
payable cantly from
the beginning of each year (annuity-due basis). In addition, the lease agree-
other types of assets, such disclosure benefits users
Impairment and Presentation of Intangible Assets of the
ment balance
12-15
specifies sheet.
that the lease payment increases by $30,000 every year.
On the income statement, companies should present amortization expense and impair-
ment losses for intangible assets other than goodwill separately
Question: What areand
the as part
lease of continuing
payments in 2021?
These unique illustrations include mini- operations (see Illustration 12.11). Goodwill impairment losses should also be presented as
(undiscounted) is less than the carrying amount of the asset, the company measures and rec-
ognizes an impairment loss. [10]
a separate line item in the continuing operations section, Solution:unless the 1,goodwill
On January 2021, the impairment
lease payment isis$1,030,000 ($1,000,000 + $30,000), which is considered
casesTo so thatthe students
measure impairment, the can immediately
company uses the fair value test. This test measures
associated with a discontinued operation. a variable payment. Given that the amount of the variable payment is known from year to year (the rate
the impairment loss by comparing the asset’s fair value with its carrying amount. The im- is set at commencement of the lease and in substance fixed), such variable payments are included in
understand how
pairment loss is the to amount
carrying applyofthe accounting
the asset
The notes to the financial statements should calculating
less the fair value of the impaired asset. As
include information about acquired in-
the present value of the lease liability.
tangible assets, including the aggregate amortization expense for each of the succeed-
concepts and procedures to specific sit- ing five years. If separate accumulated amortization accounts are not used, accumulated
with other impairments, the loss on the limited-life intangible is reported as part of income
from continuing operations. The loss is generally reported in the “Other expenses and losses”
amortization should be disclosed in the notes. The notes should include information
uations.
section of the income statement.
about changes in the carrying
ILLUSTRATION 21.4amount of goodwill during theVARIABLE
EXPENSING period. LEASE PAYMENTS
To illustrate, assume that Lerch, Inc. has a patent on how to extract oil from shale rock.
Variable Lease Payments Facts: Assume the same information as in Illustration 21.3, except that the lease payments are adjusted each
Unfortunately, several recent non-shale oil discoveries adversely affected the demand for
year by a change in the Consumer Price Index (CPI).
shale-oil technology. Thus, the patent has provided little income to date. As a result, Lerch
performs a recoverability test. It finds that the expected future net cash flows from this patent
Question: If the CPI is 100 at January 1, 2020, and increases to 104 on January 1, 2021, what is the
are $35 million. Lerch’s patent has a carrying amount of $60 million. Because the expected
Research and Development Costs
future net cash flows of $35 million are less than the carrying amount of $60 million, Lerch
must determine an impairment loss.
payment on January 1, 2021?

Solution: The variable payment on January 1, 2021, is $1,040,000 ($1,000,000 × 1.04). Because the amount of
Discounting the expected future net cash flows at its market rate of interest, Lerch deter- the variable payment from year to year is not known at the lease commencement date, this payment is not in-
mines the fair value of its patent to be $20 million. Illustration 12.6 Lshows the impairment
EA RNI NG O BJ ECTI VE 5 cluded in determining the present value of the lease liability. This additional payment ($40,000) is recognized
loss computation (based on fair value). as an expense in the period it is incurred. Similarly, when lease payments vary with a performance measure
Describe accounting and presentation for research andatdevelopment
(e.g., sales a store location,and
assetsimilar
usage), the variable amounts will be expensed in the period incurred.
Carrying amount of patent costs.
$60,000,000 ILLUSTRATION 12.6
Less: Fair value (based on present value computation) 20,000,000 Computation of Loss on
Loss on impairment $40,000,000 Impairment of Patent the end of the lease, except to return the leased asset to the lessor. [5] For classification
Research and development (R&D) costs are not inpurposes, themselvestheintangible assets.the
lessee includes However,
full amount of the residual value guarantee at the end
we present the accounting for R&D costs here because of R&D activities
the lease termfrequently resultvalue
in the present in thetest. The lessee does not consider unguaranteed

Underlying Concepts
Lerch records this loss as follows. development of patents or copyrights (such as a new residual product,value
process, idea, formula, compo-
Underlying as part of the present value test.4
Loss on Impairment 40,000,000 sition, or literary work) that may provide future value.
Concepts 4. Payments related to purchase or termination options that the lessee is reasonably
Patents Many companies spendPage
c12IntangibleAssets.indd
40,000,000 considerable
12-24 sums 1:11
24/10/18 on research
PM f-0551 and development. Illustration 12.12 /208/WB02413/9781119503705/ch12/text_s
The basic attributes certain
of to exercise. As indicated earlier, if the lease contains a bargain purchase op-
c21AccountingForLeases.indd Page 21-15 03/10/18 1:43 PM F-0590 shows the outlaysisfor
its R&D
new made /208/WB02413/9781119503705/ch21/text_s
by selected global companies.
After recognizing the impairment, the reduced carrying amount of the patents
cost basis (see Underlying Concepts). Lerch should amortize the patent’s new cost over its
intangibles, their uncer- The Underlying Concepts highlight and
tion, the cost of that option should be considered part of the lease payments. Analysis of
a termination option is indicated in Illustration 21.5.
remaining useful life or legal life, whichever is shorter. Even if shale-oil prices increase in sub-
tainty as to future benefi
and their uniqueness
Sales
ts,
have
explain major conceptual topics in the
ILLUSTRATION 12.12
sequent periods and the value of the patent increases, Lerch may not recognize restoration
of the previously recognized impairment loss. 12-24 C H ACompany
ILLUSTRATION PTE discouraged
R 12
21.5 Intangible valuation
(billions)
Assets in R&D/Sales
ANALYZING A TERMINATION OPTION
of Sales
chapter.
R&D Outlays, as a Percentage
Option excess
TerminationFacebook
Accounting of cost.
for Finance $ 40,653
Leases 21-1519.07% Facts: Cabrera Company leases a building and land from Worldwide Leasing for 6 years with monthly pay-
Motorola 6,380 8.90
ments of $10,000. The lease contract allows Cabrera to terminate the lease after 2 years for a total payment of
Impairment
identical of Indefinite-Life
to the tests used by the lessee to determine Intangibles
classification of a leaseOther
ILLUSTRATION
asMerck’s
a financing
R&D
3M 12.16
Boeing
Disclosure
31,657
93,392
5.84
Merck
$140,000. At the & Co., Inc.
commencement
3.40
of the lease, it is reasonably certain that Cabrera will not continue the lease
beyond 2 years.
or operating lease, as shown in Illustration 21.6. Why use the same criteria for both the lesseeKimberly-Clark
Than Goodwill
18,259 1.70
Research and development in the pharmaceutical industry is inherently a long-term process.

Global View
and the lessor? The reason is that the tests are used to determine whether the lessee andPepsiCo 63,525 1.16
The following data show the trend of the Company’s research and development spending. For
Yum Brands 5,878Question: What
0.37are Cabrera’s lease payments?
the lessor have
Companies an agreement
should test indefito transfer
nite-life control ofother
intangibles the asset
thanfrom one party
goodwill to the other.atIfleast
for impairment the the period 2004 to 2017, research and development expenditures approximately tripled.
lessee receives
annually. control, thentest
The impairment theforlessor must have
an indefi given
nite-life up control.
intangible asset other than goodwill is a Solution: In this case, Cabrera should include the cost of the termination option in its calculation of the
fair The FASB concluded
This testthat by meeting anyvalue
of theoflease
the classification testswith
in Illustration
the asset’s21.6, present value of its lease liability. The total lease payments are therefore $380,000 [($10,000 × 24) +
Global Views provide students with
the
rying
value
lessor
amount.
test.
transfers
If thecontrol
compares
fair valueof isthe
the fair
leased
less assetcarrying
than the
intangible
and therefore
amount,satisfi
asset
Two difficulties
es a performance
the company recognizesob-
car-
arise
an
in accounting for R&D expenditures:
$140,000]. (1) identifying the costs associ-
$12,000
R&D Expenditures

ated with particular activities, projects, or achievements, and (2) determining the magnitude of Global View
specific examples of how global com-
ligation, which is required for revenue recognition under the FASB’s
impairment. Companies use this one-step test because many indefinite-life assets easily meet
revenue. [10] Thattest is, (because
the lessorcash has,flin substance, transferred
recent
the future
control
standard
benefi
on
ts and length of time over which such benefits may be realized. Because of these IFRS requires the
the recoverability ows may extend many years into ofthethe right-of-use
future). Thus,
panies (and countries) ­implement
asset and therefore
companies do nothas useathesales-type lease iftest.
recoverability the lessee takes ownership latter uncertainties,
must
or consumes athe
expense all
FASB has simplified the accounting practice in this area. Companies
sub-
research and development costs
7,000
Discount Rate To determine whether the presentcapitalization
when incurred (see Global View). [14]
of certain equals or exceeds
value of the payments
stantial portion ofassume
the underlying asset overpurchased
the lease aterm. On the otherforhand, if the lease 90 percent of the fair value of the leased asset, a lessee development
(like theexpendi-
Delta example presented
key accounting regulations. They also
does
To illustrate,
licensenotis transfer
renewable control
that Arcon
everyof10theyearsasset
Radio
over
if the the lease
company
broadcast
term, the
provides
license
lessor will
appropriate
$2,000,000.
generally
service
The
use the
and does not earlier)5,000 tures.
should compute the present value of the lease payments using This confl ictsthe
withimplicit interest
GAAP.
provide examples of how and where
operating approach in accounting for the lease. [11] Although not
violate Federal Communications Commission (FCC) rules. Arcon Radio has renewed the license
tests, the lessor must also determine whether the collectibility of
part of the classifi
Identifying R&D Activities
payments from the
cation
lessee
rate. [6] This rate is defined as the discount rate that, at commencement of the lease, causes
4,200
with the FCC twice, at a minimal cost. Because it expects cash flows to last indefinitely, Arcon the aggregate present value of the lease payments and unguaranteed residual value to be equal
(in millions)

IFRS differs from GAAP.

is probable.
reports If payments
the license are not
as an indefi probable,
nite-life the lessor
intangible asset.does not record
Recently, the FCCa receivable
decided
Illustration
and
to
12.13
does
auction
shows
to the fair value of the leased asset. [7]
not derecognize
signifi cantly morethe leased
of these asset. Instead,
licenses. As a receipt
result, Arcon ofRadio
any lease
expectspayments
reduced is recorded
cash flows for athe definitions for research activities and development activities.
asthe
12 These defi nitions differentiate research and development 3,150
costs from other similar costs. [15]
deposit
remaining liability. [12]of its existing license. Arcon performs a fair value test for this indefinite-life
two years R&D activities do not include routine or periodic 4 alterations
As discussed in moretodetail
existing products, produc-
later, consideration of the guaranteed residual values differs for classification of the lease
intangible and determines that the fair value of the intangible asset is $1,500,000. Arcon there-
tion lines, manufacturing processes, and other ongoing operations,
and measurement evenliability.
of the lease though these alter-
2,100
fore reports an impairment loss of $500,000, computed as shown in Illustration 12.7.
What Do the Numbers Mean? Not So Fast
Carrying amount of broadcast license
ations may represent
improve the qualities of an existing
$2,000,000
product are
ILLUSTRATION not considered R&D activities.
12.7
1,050
What Do the Numbers Mean?
improvements. For example, routine ongoing efforts to refine, enrich, or

Less: Fair value of broadcast license 1,500,000 Computation of Loss on

As an illustration of the importance of the control criteria, consider to sell it to the computer leasing companies. As a result, a number
Lossleasing
the case of computer on impairment
companies, which at one time bought of$ the
500,000 Impairment of Broadcast
lessors could not meet their contracts with their customers
License
The “What Do the Numbers Mean?” boxes
IBM equipment, leased the equipment to their customers, and re- and had to take back the old equipment. Thus, control had not been 0
further students’ understanding of key con-
04

05

06

07

08

09

10

11

12

13

14

15

16

17
moved the leased assets from their balance sheets. In leasing the fully transferred and the computer leasing companies therefore
20

20

20

20

20

20

20

20

20

20

20

20

20

20
assets, the computer lessors stated that they would substitute new had to reinstate the assets they had taken off the books. Such a case
IBM equipment if obsolescence occurred (a sales return provision). demonstrates one reason why the lessor classification tests must be cepts with practical,
Years
real-world examples.
However, when IBM introduced a new computer line, IBM refused aligned with those for revenue recognition.

Accounting Measurement and Presentation

Classification of the lease as either a sales-type or operating lease determines the subsequent
Evolving Issue
accounting by the lessor.13 For a sales-type lease, the lessor accounts for the lease in aEvolving
manner Issue Recognition of R&D and Internally Generated Intangibles
similar to the sale of an asset. Under a sales-type lease, the lessor generally records a Lease
Receivable and eliminates the leased asset. The lease receivable for Sterling is computed as
The requirement that companies expense immediately all R&D for R&D-intensive companies. Another study found that there was
The Evolving Issue feature introduces
shown in Illustration 21.11.14 costs (as well as start-up costs) incurred internally is a practical a significant decline in earnings’ usefulness for companies that were
solution. It ensures consistency in practice and uniformity among forced to switch from capitalizing to expensing R&D costs, and that
and discusses a current topic in the ac- companies. But the practice of immediately writing off expen- the decline appears to persist over time.
ILLUSTRATION 21.11
counting industry=in Present which the+ profes-
Value of
Present Value of Guaranteed
ditures made in the expectation of benefiting future periods is
Lease Receivable
conceptually incorrect.
The current accounting for R&D and other internally gener-
ated intangible assets represents one of the many trade-offs made
Lease Receivable and Unguaranteed
sion may be encountering controversyResidual Values comeProponents
Rental Payments of immediate expensing contend that from an in-
statement standpoint, long-run application of this standard
among relevance, faithful representation, and cost-benefit consid-
erations. The FASB and IASB have completed some limited-scope
or nearing resolution. The feature shows frequently makes little difference. They argue that because of the projects on the accounting for intangible assets, and the Boards have
ongoing nature of most companies’ R&D activities, the amount of contemplated a project on the accounting for identifiable intangible
howAnythe sellingkey standard-setting
profit on organi-
the transfer of the leased asset is recognized by recording R&Dsalescost
rev-charged to expense each accounting period is about the assets (i.e., excluding goodwill). Such a project would address con-
same, whether there is immediate expensing or capitalization and cerns that the current accounting requirements lead to inconsistent
zations make decisions to adjust to the
enue and related cost of goods sold at the commencement of the lease. The lessor recognizes
subsequent amortization. treatments for some types of intangible assets depending on how

changing global business environment.

12
Others criticize this practice. They believe that the balance
sheet should report an intangible asset related to expenditures that
they arise.

If classified as an operating lease and collectibility is not probable, recognition of lease income is limitedhave
to cash Sources for research studies: Baruch Lev and Theodore Sougiannis,
future benefit. To preclude capitalization of all R&D expen-
received. “The Capitalization, Amortization, and Value-Relevance of R&D,” Journal
ditures removes from the balance sheet what may be a company’s
13
We call it a sales-type lease because there is another type of lease for a lessor that uses the finance method, called of Accounting and Economics (February 1996); and Martha L. Loudder and
most valuable asset. Bruce K. Behn, “Alternative Income Determination Rules and Earnings
a “direct financing lease.” Direct financing leases are not that common in practice; we discuss this exception in Indeed, research findings indicate that capitalizing R&D costs
Appendix 21B. Usefulness: The Case of R&D Costs,” Contemporary Accounting Research
may be helpful to investors. For example, one study showed a signif- (Fall 1995). See also the recent critique of the accounting for intangible
14
Lease Receivable is often defined as only the present value of the rental payments plus the present value icant
of the relationship between R&D outlays and subsequent benefits in assets in Baruch Lev and Feng Gu, The End of Accounting (Hoboken, NJ:
guaranteed residual value. In the case in which the lessor has an unguaranteed residual value, the total amount is of increased productivity, earnings, and shareholder value
the form John Wiley & Sons, 2016).
often referred to as the net investment in the lease. Another approach is to report the unguaranteed residual value
separately when making the journal entry. We use the definition in Illustration 21.11 for pedagogical reasons; this
definition (including both guaranteed and unguaranteed residual values) should be used in the homework.
xii Pr oven Pedag ogical F ramework

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End-of-Chapter Pedagogy
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Review and Practice 12-25

Review and Practice Review and Practice Using Your Judgment 12-39

Instructions
Review and Practice section includes Keya. Terms
What is the Review
meaning of “discounted value of expected net receipts”? Explain.
Key Terms Review, Learning Objec- b. How would such a value be calculated for net royalty receipts?

tives Review, and a Practice Problem c. What basis

amortization
bargainreasons
purchase
12-4of valuation for Ferry’s patents would
for this basis.
12-14
be generally
impairment 12-14accepted in accounting? Give supporting
indefi nite-life intangibles 12-4
recoverability test 12-14
research activities 12-19
with Solution. In addition, multiple- c12IntangibleAssets.indd
business Page 12-39 24/10/18
combination 12-4(n) 1:11 PM f-0551 intangible assets 12-3
d. Assuming no practical problems of implementation and ignoring generally accepted accounting
copyright 12-8 license (permit) 12-9
/208/WB02413/9781119503705/ch12/text_s
research and development
costs 12-19
(R&D)
principles, what is the preferable basis of valuation for patents? Explain.
choice questions with solutions, re- development
e. What
fair value
activities
test would
12-19 limited
12-15be the preferable theoretical basis
(fi nite)-life
of valuation
master amortization?
intangibles
Explain.
approach
12-4
12-13
start-up costs 12-21
trademark, trade name 12-6
view exercises with solutions, and franchise
f. What
goodwill
12-8
recognition, if any, should be made of organizational
the infringementcosts litigation
12-21 in the financial statements
for 12-11 patent 12-9
the year ending September 30, 2020? Discuss.
a full glossary of all key terms are
c12IntangibleAssets.indd Page 12-26 24/10/18 1:11 PM f-0551 /208/WB02413/9781119503705/ch12/text_s
(AICPA adapted)
Using Your Judgment 12-39

available online. CA12.3

Instructions(LO 5) Writing (Accounting for Research and Development Costs) Cuevas Co. is in
Learning
a. What isObjectives
the process of Review new
developing a revolutionary
the meaning of “discounted
product. A new division of the company was formed to de-
value of expected net receipts”? Explain.
velop, manufacture, and market this new product. As of year-end (December 31, 2020), the new product
hasb. not
How beenwould such a value
manufactured forberesale.
calculated
However, for net royalty receipts?
a prototype unit was built and is in operation.
12-26 C H APT ER 1 2 Intangible Assets
Throughout
c. What basis of 2020,
valuation thefornew division
Ferry’s patentsincurred
would becertaingenerally costs.
accepted These costs include
in accounting? Givedesign
supportingand
engineering
reasons for
1 Discuss studies,
the this prototype manufacturing
basis.
characteristics, valuation, andcosts, administrative expenses
amortization 3 Explain (including salaries ofissues for recording goodwill.
the accounting
expenditures are (1) identifying the costs associated with particular for R&D
administrative costs. Financial
personnel), and statements
market research must
costs. disclose
In the approximately
addition, total R&D $900,000 in equipment
ofd.intangible
Assuming assets. no practical problems of implementation and ignoring generally accepted accounting
activities, projects, or achievements, and (2) determining the mag- ancosts
(withprinciples, charged
estimated what
to expense
useful
is thelife of each period forpurchased
10 years)
preferable basiswas
which an income
of valuation forfor use in
patents?
statement
developing and manufacturing the
Explain.
nitude of the future benefits and length of time over which a com- is presented. Unlike receivables, inventories, and patents that a company can sell
new product. Approximately $315,000 of this equipment was built specifically for the design development
or exchange individually in the marketplace, goodwill can be identi-
pany may realize such benefits. Because of these latter uncertainties, ofe.theWhat
Intangible would
newassets
product. be The
have thetwopreferable
main theoretical
remaining characteristics:
$585,000 ofbasis of(1)
equipment amortization?
they
waslackused to Explain.
manufacture the pre-production
companies are required to expense all research and development physical existence,
f. Whatand and
recognition, (2) they
if any, are not financial
should be made instruments.
of the In
infringement most fied only
litigation in the with the company
fiproduction.
nancial statements as a whole. Goodwill is a “going con-
prototype will be used to manufacture the new product once it is in commercial
costs when incurred. cases, intangible
for the year assets
ending provide
Septemberservices 30,over
2020? a period
Discuss. of years and so cern” valuation and is recorded only when an entire business
Illustration 12.14 shows typical costs associated with R&D areac-normally classifi
Instructions Enhanced ed as long-term Review assets.and Practice is purchased. (AICPA adapted) not capitalize goodwill generated
A company should
tivities and the accounting treatment accorded them. Many costsa.Intangibles are recorded at cost. Costdefi includes all authoritative
acqui- internally. The future benefits of goodwill may have no relationship to
CA12.3 How are “research”
Writing and “development”
(Accounting forthe ned
Research in theandassetDevelopment literature
Costs) (GAAP)?Cuevas
have characteristics similar to R&D costs. Examples are start-up sition costs(LO Go
and 5)expenditures
online for multiple-choice
needed to make questions with solutions,
intangible reviewthe costs incurred in theCo. is in
development of that goodwill. Goodwill may
b.process
the Brieflits yintended
indicate
of developing
exercises the practical
with aIf
solutions, and
revolutionary andconceptual
new
aare product.
fullacquired
glossaryreasons allfor
A exchange
of new key the
division conclusion
terms. ofexist reached
the company
even in the byabsence
was the Financial
formed oftospecifi
de- c costs to develop it.
costs, initial operating losses, and advertising costs. For the ready most for use. intangibles in
for velop,
stockAccounting
manufacture,
or other Standards
assets,and the Board
market
cost of on
thisthe accounting
new product.
intangible and
As
is reporting
of
the year-end
fair practices
value (December for To
research
31, 2020),
record and
the development
new
goodwill, product
a company compares the fair value of the
part, these costs are expensed as incurred, similar to the accounting
of has
thenotcosts.been manufactured
consideration given orforthe resale.
fair However,
value of the a prototype
intangible unitre- was built netand is in operation.
tangible and identifiable intangible assets with the purchase
ceived,c. InThroughout
accordance
whichever 2020, the
with GAAP,
is more new
clearlyhow division
should
evident. When incurred
the various
a company certain
costsmakescosts. These
price costs
of the include
acquired
of Cuevas described above be recorded on design
business.and The difference is considered goodwill.
engineering
a “basket thepurchase” studies,
financial of prototype
statements
several for manufacturing
the year ended
intangibles costs, administrative
December
or a combination 31,of2020?
in- expenses
Goodwill (including
is the residual. salaries of is often identified on the balance
Goodwill
administrative personnel), and market research costs.
onIn addition,
basis ofapproximately sheet as the $900,000
excess in cost
of
(AICPA equipment
over the fair value of the net assets acquired.
adapted)
Practice Problem
tangibles and tangibles, it should allocate the cost the
Practice Problem fair(with
values.an estimated useful life of 10 years) was purchased for use in developing and manufacturing the
CA12.4
new product.(LO 5) Ethics (Accounting
Approximately forequipment
Research was andbuilt
Development cally Costs) Czeslaw Corpora-
Intangibles have either$315,000 a limited of useful
this life or an indefi specifi
- for the design
4 Identify
development
impairment
tion’s
of the research
newlife. and development
product. The remaining department of has an idea forwas a project
used toit manufacture
believes will culminate in a newprocedures and presentation
nite useful Companies amortize$585,000
limited-lifeequipment
intangibles. They the pre-production
product that andwould beused
verytoprofi table for the thecompany. Because theis project requirements
will be production. for intangible
very expensive, the assets.
doprototype will be manufacture new product once it in commercial
Sky Co., organized in 2020, not amortize
provided
department you indefi
with
requests thenite-life
following
approval
intangibles.
from information. Limited-life intangibles
the company’s controller, Jeff Reid.
should be amortized by systematic charges to expense over their
The Practice Problem offers students
Reid recognizes
forInstructions that corporate profi ts have been downrightslatelyto and is its
hesitant to approve a project that
1. Purchased a licenseuseful
services in the tri-state
assets
$20,000
will
a. will
How and
on July
arewill
contribute
1,
expire
“research”
2020.
onand
to cash
The
July
license
1, 2028.
“development”
flows.
gives
life. The useful life should reflect the period over which these
incur
region significant expenses that
The amount
Sky
defi
exclusive
cannot be capitalized due to the requirements
toned in the
report forauthoritative
amor-
sell
isliterature
a comprehensive exercise, incorpo-
Impairment occurs when the carrying amount of the intangible asset
of the Companies
not recoverable.
(GAAP)?
authoritative use a recoverability test and a fair value
2. Purchased a patent on
literature. He knows that if they hire an outside firm that does the work
January
tization
b. Briefl 2,y2021,
expense indicate for $40,000.
should the It ispattern
reflpractical
ect the estimated
and to haveareasons
in which
conceptual
process, Czeslaw Corporation can purchase the patent from the outside use
acompany
5-yearfor life.
con-
the testand
conclusion
firm onlyreached
and rating many of the chapter’s topics,
obtains aimpairments
to determine
record
a fair
by
the
patent for the
the
value
Financial
expenditure
for limited-life intangibles. Companies
test for indefinite-life intangibles. Goodwill
sumes or uses up theInternet
asset, if Board
it can on reliably determine that pattern.
3. Costs incurred to develop as anAccounting
an Reid Standards
exclusive knows thatconnection accounting
processownasR&D and
of reporting
June practices
1, 2021, iswere for research and development
Otherwise,
$45,000. The process has canan
asset.
costs.
do
use
indefi
the work
a straight-line
nite life.
well.
the company’s
approach.
department first-rate,
impairments followed by a detailed, step-by-step
and heare is based
confi dent
on a they
fair value test of the reporting unit.
With respect to presentation, on the balance sheet, companies

corded in the transaction

c. In accordance
4. On April 1, 2021, Sky purchased
2 Discuss
Instructions
the$90,000.
was
with GAAP,
a small circuit
the accounting
financial statements for
board how
forthe
should thefor
manufacturer
various
year ended
various
$350,000.
typesDecember
costsGoodwill
of intangible 31, 2020?
solution.
of Cuevasre-described above be recorded on
should report all intangible assets other than goodwill as a separate
item. Contra accounts are not normally shown. If goodwill is present,
assets.
5. On July 1, 2021, legalAnswerfees forthe following
successful questions.
defense of the patent purchased on January 2, 2021, (AICPA adapted)
it too should be reported as a separate item. On the income statement,
were $11,400. CA12.4
a. Who(LO are5) theEthics
stakeholders (Accounting
in this situation?for Research and Development companies
Costs) should Czeslaw report
Corpora-amortization expense and impairment
c12IntangibleAssets.indd6.Page 12-40 and
Research 24/10/18 1:11
Major
development PMtypes
tion’s f-0551 of
research
costs intangibles as ofare
andethical
incurred development (1) marketing-related
September department
1, 2021, were has an intangibles,
idea for a used
$75,000. losses in/208/WB02413/9781119503705/ch12/text_s
project it believes continuing
will culminate operations.
in a new The notes to the financial statements
b. What are the issues involved?
in product
the marketingthat would or promotion
be very profi of products
table for or theservices;
company. (2)Because
customer- the projecthave will
additional
be verydetailed
expensive,information.
the
Instructions relatedc. What shouldresulting
intangibles, Reid do? from interactions with outside parties;
department requests approval from the company’s controller, Jeff Reid.
(3) artistic-related
Reid recognizesintangibles,
that giving
corporate ownership
profi
a. Prepare the journal entries to record all the entries related to the patent during 2021. ts have rights
been to
down such items
lately and is hesitant to approve a project that
5 Describe accounting and presentation for research
as will
playsincurand literary
significant works; (4) contract-related
expenses that cannot be intangibles,
capitalized represent-
due to the requirements of the authoritative
b. At December 31, 2021, an impairment test is performed on the license purchased in 2020. It is and development and similar costs.

Using Your Judgment

ingliterature.
the valueHe of knows
rights that thatarise
if they fromhirecontractual
an outsidearrangements;
firm that does(5) the work and obtains a patent for the
12-40 CHAPT ER 1 2 Intangible
estimated Assets
that the net cash flows to be received from the license will be $13,000, and its fair value
UsingCzeslaw
technology-related
process, Yourintangibles,
Judgment
Corporation relating to innovations
can purchase
is $7,000. Compute the amount of impairment, if any, to be recorded on December 31, 2021.
the patentor technological
from the outside firm and record the expenditure
advances;
as an asset. and Reid
(6) goodwill,
knows that arising from business
the company’s owncombinations.
R&D department The is first-rate,
R&D costs and he areisnotconfiindent
themselves
they intangible assets, but R&D ac-
c. What is the amountaccounting
toInstructions
canbedo reported
thefor forwell.
these
work intangible
intangibleassets assetson the balance
depends on whethersheet at theyDecember
have 31,
tivities frequently result in the development of something a com-
The Using Your Judgment section 2020? At December a31, 2021?toorP&G’s
limited
Refer indefi nite
fi
Financial Reporting Problem
Instructions
life.
nancial statements and the accompanying notes to answer pany thepatents
following or copyrights.
questions. The diffi culties in accounting for R&D

provides students with real-world

Solution
a. Does P&G report any intangible assets, especially goodwill, in its 2017 financial statements and
The
Answer Procter & Gamble
the following
accompanying notes?
Company (P&G)
questions.

homework problems including a.

(1) a The
a. fiWho
b.
nancial the
How are
including
statements
much research
the notes to the
of
stakeholders
January 2,
and
fi
P&G
2021 are presented
in this situation?
development
nancial
in Appendix B. The company’s complete annual report,
(R&D) cost was expensed by P&G in 2016 and 2017? What
statements, is available online.
Patents b. What are the
percentage ofethical issues
sales revenue involved?
and net income
40,000 did P&G spend on R&D in 2016 and 2017?
financial reporting problem, (2) a Cash
c. What should Reid do? 40,000

comparative analysis case, (3) finan- Patents

July 1, 2021
Comparative Analysis Case
11,400
cial statement analysis cases, and Cash The Coca-Cola Company and PepsiCo, Inc. 11,400

Using
The Your
financial Judgment
statements
Decemberof31,
Coca-Cola
2021 and PepsiCo are presented in Appendices C and D, respectively.
(4) an accounting, analysis, and prin- The companies’
Patent Amortization Expense complete annual reports, including
9,267 the notes to the financial statements, are available

ciples problem. Patents online.

Financial Reporting Problem
9,267

Computation of patent expense:

Instructions
Use
Thethe companies’
Procter$40,000 ×fi12/60
& Gamblenancial = information
Company to answer the following questions.
$8,000
(P&G)
$11,400 × 6/54 = 1,267
The
a. fi1.nancial statements
What amounts forofintangible
P&G areassets
presented
werein Appendix
reported B. The
in their company’s
respective complete
balance sheetsannual report,
by Coca-Cola
including and Total
the notes toatthe
PepsiCo financial
year-end $9,267
statements, is available online.
2017?
b. Computation of impairment 2.
loss:
What percentage of total assets is each of these reported amounts at year-end 2017?
Cost 3. What was the change in the amount of intangibles from 2016 to 2017 for Coca-Cola and PepsiCo?
$20,000
Less: Accumulated amortization
b. 1. On ($20,000
what basis and over × 18/96)
what 3,750
periods of time did Coca-Cola and PepsiCo amortize their intangi-
Book value ble assets? $16,250
2. What were the amounts of accumulated amortization reported by Coca-Cola and PepsiCo at the
end of 2016 and 2017?
3. What was the composition of the identifiable and unidentifiable intangible assets reported by
Coca-Cola and PepsiCo at the end of 2017?

Financial Statement Analysis Cases

Case 1: Merck and Johnson & Johnson
Merck & Co., Inc. and Johnson & Johnson are two leading producers of healthcare products. Each
has considerable assets, and each expends considerable funds each year toward the development of new
products. The development of a new healthcare product is often very expensive, and risky. New products
frequently must undergo considerable testing before approval for distribution to the public. For example,
it took Johnson & Johnson 4 years and $200 million to develop its 1-DAY ACUVUE contact lenses. Below
are some basic data compiled from the financial statements of these two companies.
Assets.indd Page 12-42 26/10/18 8:56 AM f-0551 /208/WB02413/9781119503705/ch12/text_s

  P r oven Pedago gical F ramewo rk xiii

42 C H APTER 12 Intangible Assets

Data Analytics NEW

Analytics in Action
Analytics in Action activities discuss
Accounting software systems collect vast amounts of data about the economic events experienced
by a company and about the parties with whom the company engages, such as suppliers and how data analytics are used for spe-
customers. Business decision-makers take advantage of this wealth of information by using data cific accounting situations as well
analytics, which often employs both software and statistics, to draw inferences and make more
informed business decisions. As both data access and analytical software improve, the use of data
as offer hands-on experience so that
analytics to support decisions is becoming increasingly common at virtually all types of companies. students understand the power and
For example, consider goodwill, which has been rising briskly since 2011, to a total of value of analytical tools.
$3.408
c12IntangibleAssets.indd trillion
Page 12-42 among
26/10/18 all corporate filers in 2015. The bad news is that
8:56 AM f-0551 impairments have plum-
/208/WB02413/9781119503705/ch12/text_s
meted further during this same period, from a low of $34.66 billion in 2013 to $83.02 billion
in 2015 (see http://www.radicalcompliance.com/2016/05/04/impairments-hinting-at-bigger-
problems-ahead/). So are goodwill impairments more likely as goodwill balances rise? Business
12-42 CHA PTER 12 Intangible Assets
decision-makers would definitely want to investigate this trend further using data analytics.

Instructions Go to Analytics
WileyPLUS in Action
for a data analytics exercise focusing on goodwill for companies
in the Dow Jones average.
Accounting software systems collect vast amounts of data about the economic events experienced
by a company and about the parties with whom the company engages, such as suppliers and
customers. Business decision-makers take advantage of this wealth of information by using data
analytics, which often employs both software and statistics, to draw inferences and make more
informed business decisions. As both data access and analytical software improve, the use of data
analytics to support decisions is becoming increasingly common at virtually all types of companies.

idge to the Profession For example, consider goodwill, which has been rising briskly since 2011, to a total of
$3.408 trillion among all corporate filers in 2015. The bad news is that impairments have plum-
meted further during this same period, from a low of $34.66 billion in 2013 to $83.02 billion
in 2015 (see http://www.radicalcompliance.com/2016/05/04/impairments-hinting-at-bigger-
problems-ahead/). So are goodwill impairments more likely as goodwill balances rise? Business

SB Codification References [15] FASB ASC Master Glossary. [Predecessor literature: “Accounting
decision-makers would definitely want to investigate
c12IntangibleAssets.indd Pagethis12-43
trend further
24/10/18using dataPM
1:11 analytics.
f-0551 /208/WB02413/9781119503705/ch12/text_s

for Research and Development Costs,” Statement of Financial

Instructions Go to WileyPLUS for a data analytics exercise focusing on goodwill for companies
] FASB ASC 350-10-05. [Predecessor literature: “Goodwill and Accounting Standards No. 2 (Stamford, Conn.: FASB, 1974), par. 8.]
in the Dow Jones average.

Other Intangible Assets,” Statement of Financial Accounting [16] FASB ASC 805-10. [Predecessor literature: “Business Com-
Standards No. 142 (Norwalk, Conn.: FASB, 2001).]
Bridge to the Profession
] FASB ASC 350-30-35. [Predecessor literature: “Goodwill and
binations,” Statement of Financial Accounting Standards No.
141–Revised (Norwalk, Conn.: FASB, 2007), par. E11.]
Bridge to the Profession IFRS Insights 12-43

Other Intangible Assets,” Statement of Financial Accounting [17] FASB ASC ASC730-10-25-2.
CE12.3 What guidance[Predecessor
does the Codification literature: “Accounting
provide concerning the Instructions
FASB Codification References [15] FASB Master Glossary. [Predecessor literature: “Accounting
Standards No. 142 (Norwalk, Conn.: FASB, 2001), par. 11.]
[1] FASB ASC 350-10-05. [Predecessor literature: “Goodwill and
for Research
disclosure
for Research andandofDevelopment
research and
Development
development
Costs,” Statement (R&D) costs?
Costs,”of Financial
Statement of Financial This section
If your school includes
has a subscriptionFASB
to the FASB Codification
Codification, log in and Refer-
] FASB ASC 805-10. [Predecessor literature: “Business Combina- Accounting Standards No. 2 (Stamford, Conn.: FASB, 1974), par. 8.]
CE12.4 What is the nature of the authoritative guidance for advertising
FASB, 1974),ences,
prepare responses to the following. Provide Codification references
Other Intangible
tions,” Statement of Financial Accounting
Standards No. 142
Assets,” Statement
Standards
of Financial AccountingAccounting
No.FASB,
(Norwalk, Conn.: 141R 2001).]
[16] FASB Standards
costs for
No. 2 (Stamford,
ASC 805-10. [Predecessor
entertainment companies?
Conn.:Com-
literature: “Business Codification
par. 11.] for your responses. Exercises, and a Codification
[18]andFASB ASC 730-20-05. [Predecessor literature: “Research and De-
binations,” Statement of Financial Accounting Standards No.
[2] FASB ASC 350-30-35. [Predecessor literature: “Goodwill
(Norwalk, Conn.: FASB, 2007).] Other Intangible Assets,” Statement of Financial Accountingvelopment
141–Revised (Norwalk, Conn.: FASB, 2007), par. E11.]
[17] FASB Arrangements,”
Codification
ASC 730-10-25-2.Research Statement
[Predecessor Case of Financial Accounting
literature: “Accounting
Research Case,
a. Identify theall designed
accounting
other intangible assets.
literature to
that refer
addressesstudents
goodwill and to the

relevant FASB literature for key concepts in the

Standards No. 142 (Norwalk, Conn.: FASB, 2001), par. 11.]
] FASB ASC 350-30-35. [Predecessor literature: “Goodwill and
[3] FASB ASC 805-10. [Predecessor literature: “Business Combina-Standards
for Research and Development Costs,” Statement of Financial
No. 68 (Stamford, Conn.: FASB, 1982).] b. Defi ne goodwill.
King Company is contemplating the purchase
Accounting Standards No. 2 (Stamford, Conn.: FASB, 1974), par. 11.] of a smaller company,
Other Intangible Assets,” Statement tions,” of Financial
Statement of FinancialAccounting
Accounting Standards No. 141R
[19] FASB [18]ASC 720-15-25. [Predecessor literature: De-“Reporting onisthe
which is a distributor of King’s products. Top management
text
of King
and provide assessment of their understanding.
FASB ASC 730-20-05. [Predecessor literature: “Research and c. Is goodwill subject to amortization? Explain.
(Norwalk, Conn.: FASB, 2007).]
Standards No. 142 (Norwalk, Conn.:
[4] FASBFASB, 2001), [Predecessor
ASC 350-30-35. par. B55.] literature: “Goodwill andCosts of
velopment
Start-up
Standards
Arrangements,”
Activities,”
No. 68 (Stamford,
Statement
Conn.: FASB,
of Financial
Statement
1982).]
Accounting
convinced that the acquisition will result in significant synergies in its
of Position 98-5 (New d. What is the quantitative impairment test? Are defined taxes con-
selling and distribution functions. The financial management group
] FASB ASC 805-10-20. [PredecessorOther literature: “Business
Intangible Assets,” Combi-
Statement of Financial Accounting
York: AICPA, 1998).]
[19] FASB ASC 720-15-25. [Predecessor literature: “Reporting on the sidered in the test? Explain.
Standards No. 142 (Norwalk, Conn.: FASB, 2001), par. B55.] Costs(ofofwhich
Start-upyou are a part)
Activities,” has been
Statement asked 98-5
of Position to prepare
(New some analysis of
nations,” Statement of Financial[5]
Accounting
FASB ASC 805-10-20.Standards No.
[Predecessor 141R“Business[20]
literature: Combi-FASB ASC York:the 915-205-45-1.
effects
AICPA, [Predecessor
of the acquisition
1998).] literature:company’s
on the combined “Accounting
financialand
nations,” Statement of Financial Accounting Standards No. 141R
(Norwalk, Conn.: FASB, 2007).] (Norwalk, [20] FASBstatements.
Reporting This [Predecessor
ASC 915-205-45-1.
by Development is the firstliterature:
acquisition for King,
“Accounting and and some of the
Conn.: FASB, 2007).] Reporting
senior by staff
Development StageStage
insist that
Enterprises,”
Enterprises,”
based Statement
on their
Statement
of Financial
recollection
of Financial Additional Professional Resources
of goodwill account-
] FASB ASC 805-10-30. [Predecessor literature:
[6] FASB “Business
ASC 805-10-30. [Predecessor Combi-
literature: “Business Combi-
Accounting Standards
Accounting Standards No.No. 7 (Stamford,
7 (Stamford, Conn.: FASB, Conn.:
1975), par.FASB,
10.] 1975), par.on
10.]
nations,” Statement of Financial Accounting Standards No. 141R ing, any goodwill recorded on the acquisition will result in a “drag”
nations,” Statement of Financial Accounting
(Norwalk, Conn.: Standards
FASB, 2007).] No. 141R
[21] FASB ASC 720-35-05-3. [Predecessor literature: “Reporting
[21] FASB onASC future720-35-05-3.
earnings
Advertising Costs,” for [Predecessor
goodwill
Statement amortization.
of Position 93-7 (New literature:
York: younger“Reporting
Other members Go to WileyPLUS for other career-readiness resources, such as
(Norwalk, Conn.: FASB, 2007).] [7] FASB ASC 805-20-15. [Predecessor literature: None] on the
AICPA, staff argue that goodwill accounting has changed. Your super-
1993).] career coaching, internship opportunities, and CPAexcel prep.
[8] FASB ASC 350-20-15. [Predecessor literature: None] on Advertising Costs,” Statement of Position 93-7 (New York:
visor asks you to research this issue.
] FASB ASC 805-20-15. [Predecessor literature:
[9] FASB None]
ASC 805-10-30. [Predecessor literature: “Business Combi-AICPA, 1993).]
Codification Exercises
] FASB ASC 350-20-15. [Predecessornations,” Statement of Financial Accounting Standards No. 141R
literature: None]
(Norwalk, Conn.: FASB, 2007).] If your school has a subscription to the FASB Codification, log in and
] FASB ASC 805-10-30. [Predecessor literature:
[10] FASB “Business
ASC 360-10-05. [PredecessorCombi-
literature: “Accounting for prepare responses to the following. Provide Codification references
the Impairment or Disposal of Long-lived Assets,” Statement
nations,” Statement of Financial Accounting Standards No. Codification
of Exercises
for your responses.
Financial Accounting Standards No. 144 141R
(Norwalk, Conn.: 2001).]
CE12.1 Access the Codification glossary (“Master Glossary”) to

IFRS Insights
(Norwalk, Conn.: FASB, 2007).][11] FASB ASC 350-30-35-17A-19. [Predecessor literature: “Goodwill
] FASB ASC 360-10-05. [Predecessor literature:
Standards “Accounting
No. 142 (Norwalk, Conn.: FASB, for 2001).]
If your school has a subscription to the FASB Codification, log in and
and Other Intangible Assets,” Statement of Financial Accounting
answer the following.
IFRS Insights
a. What is the definition provided for an intangible asset?
prepare responses to the following. Provide Codification references
[12] FASB ASC 350-20-35-31. [Predecessor literature: None]. b. What is the definition of goodwill?
the Impairment or Disposal of [13]
Long-lived Assets,” Statement of
FASB ASC 350-20-35. [Predecessor literature: “Goodwill for and
your responses.
c. What is the definition of research and development (R&D)?
Financial Accounting IFRS Insights
Standards No.Other offer
144Intangible
(Norwalk, students
Conn.:
Assets,” 2001).]
Statement a detailed
of Financial Accounting
Standards No. 142 (Norwalk, Conn.: FASB, 2001).] CE12.1 Accessd. What is L athe Codifi
development
EA RNI NG cation
stageOentity?
BJ ECTI glossary
VE 6 (“Master Glossary”) to
] FASB ASC 350-30-35-17A-19. [Predecessor literature: “Goodwill
discussion
and Other Intangible Assets,” Statement
and assessment
[14] FASB ASC 735-10-25-1.
of Financial
for Research
[Predecessor
and Development Accounting
materialanswer
literature: “Accounting
Costs,” Statement of Financial
the following.
CE12.2 Your friend Harry does not understand the concept of an in-
Compare the accounting for intangible assets under GAAP and IFRS.
definite-life intangible asset. He wonders, “Does this mean the life is

(including
Standards No. 142 (Norwalk, Conn.: IFRS2001).] Self-Test Questions,
Accounting Standards No. 2 (Stamford, Conn.: FASB, 1974),
par.FASB,
12.]
a. What infinite?” What does the authoritative literature say about indefinite-life
is the definition provided for an intangible asset?
intangible assets?

IFRS
] FASB ASC 350-20-35-31. Concepts
[Predecessor andNone].
literature: Application, and
b. What is the defi
There arenition of goodwill?
some signifi cant differences between IFRS and GAAP in the accounting for both intangible
assets and impairments. IFRS related to intangible assets is presented in IAS 38 (“Intangible Assets”).
] FASB ASC 350-20-35. [Predecessor literature: “Goodwill and c. What is the defi nition of research andindevelopment (R&D)?
an International Financial Reporting
Other Intangible Assets,” Statement of Financial Accounting
IFRS related to impairments is found IAS 36 (“Impairment of Assets”).
d. What is a development stage entity?
Problem)
Standards No. 142 (Norwalk, Conn.:of international
FASB, 2001).] accounting Relevant Facts
] FASB ASC 735-10-25-1. [Predecessor
standards literature:
at the end of“Accounting CE12.2 Your friend
each chapter. Harry does not understand the concept of an in-
Following are the key similarities and differences between GAAP and IFRS related to intangible assets.
for Research and Development Costs,” Statement of Financial definite-life intangible asset. He wonders, “Does this mean the life is
Accounting Standards No. 2 (Stamford, Conn.: FASB, 1974), infinite?” WhatSimilarities
does the authoritative literature say about indefinite-life
par. 12.] intangible assets?• Like GAAP, under IFRS intangible assets (1) lack physical substance and (2) are not financial
instruments. In addition, under IFRS an intangible asset is identifiable. To be identifiable, an
intangible asset must either be separable from the company (can be sold or transferred) or it
arises from a contractual or legal right from which economic benefits will flow to the company.
Fair value is used as the measurement basis for intangible assets under IFRS, if it is more clearly
evident.
• With issuance of a converged statement on business combinations (IFRS 3 and SFAS No. 141—
Revised), IFRS and GAAP are very similar for intangibles acquired in a business combination. That
is, companies recognize an intangible asset separately from goodwill if the intangible represents
contractual or legal rights or is capable of being separated or divided and sold, transferred, licensed,
rented, or exchanged. In addition, under both GAAP and IFRS, companies recognize acquired
in-process research and development (IPR&D) as a separate intangible asset if it meets the defini-
tion of an intangible asset and its fair value can be measured reliably.
• As in GAAP, under IFRS the costs associated with research and development are segregated
into the two components. Costs in the research phase are always expensed under both IFRS and
GAAP.

Differences
• IFRS permits revaluation of limited-life intangible assets. Revaluations are not permitted for good-
will and other indefinite-life intangible assets.
Acknowledgments
Intermediate Accounting has benefited greatly from the input of focus group participants, manuscript reviewers, those who have
sent comments by letter or e-mail, ancillary authors, and proofers. We greatly appreciate the constructive suggestions and inno-
vative ideas of reviewers and the creativity and accuracy of the ancillary authors and checkers.

Prior Edition Reviewers

We greatly appreciate the over 400 reviewers who have assisted with the prior editions of Intermediate Accounting. These instructors
have been invaluable in the development and continued improvement of our text.

Seventeenth Edition Monica McElhaney Erik Frederickson

Bellevue University Madison, Wisconsin
Maggie Atkinson Cynthia Mille Danielle Griffin
Stark State College University of Kentucky KPMG, Chicago
Michael Bitter Allison Moreno Jason Hart
Stetson University Texas Tech University Deloitte LLP, Milwaukee
Stephen Brown Kingsley Olibe Frank Heflin
University of Maryland Kansas State University University of Georgia
Sudheer Kumar Chella Pete Poznanski Mike Katte
Hurix Cleveland State University SC Johnson, Racine, WI
Timothy Coville Gregory Prescott Kelly Krieg
St. John’s University University of South Alabama Ernst & Young, Milwaukee
Bill Davenport Ada Rodriguez Jeremy Kunicki
CPA Lehman College Walgreens
Charmaine Felder Mark Ross Courtney Meier
Brandman University Western Kentucky University Deloitte LLP, Milwaukee
Kristen Fuhremann David Scott Andrew Prewitt
Wisconsin School of Business Purdue University KPMG, Chicago
Liz Grant Paula Thomas Jeff Seymour
Northern Illinois University Middle Tennessee State University KPMG, Minneapolis
Vicki Greshik Bruce Wampler
University of Jamestown Matt Sullivan
Louisiana State University Shreveport Northwestern Mutual
Michael Gurevitz Jeff Wang
Montgomery College Matt Tutaj
San Diego State University
Deloitte LLP, Chicago
Coby Harmon
Dave Weber
University of California–Santa Barbara Jen Vaughn
University of Connecticut
PricewaterhouseCoopers, Chicago
James Hay
Donna Whitten
Wilson College Erin Viel
Purdue University Northwest
Michelle Hodgen-Smith PricewaterhouseCoopers, Milwaukee
Melanie Yonn
Gun-Ho Joh
Allie Zimmerman
San Diego State University
Northern Illinois University
Katie Landgraf Ancillary Authors,
University of Hawaii—West Oahu In addition, we thank the following ­colleagues
who contributed to several of the unique fea-
Contributors, Proofers,
Jim Leisenring
FASB tures of this edition. and Accuracy Checkers
Lisa Ludlum Ellen Bartely
Western Illinois University Codification Cases St. Joseph’s University (NYC)
Dan Lynch Katie Adler LuAnn Bean
Wisconsin School of Business Deloitte LLP, Chicago Florida Institute of Technology
David Massaglia Jack Cathey Jack Borke
Bemidji State University University of North Carolina—Charlotte University of Wisconsin—Platteville
xiv
   Acknowledgments xv

Melodi Bunting Mark Riley Practicing Accountants and

Edgewood College Northern Illinois University
Business Executives
Bea Chiang Alice Sineath
The College of New Jersey University of Maryland University College From the fields of corporate and public
Lynn Stallworth ­accounting, we owe thanks to the following
Susetta Emery
Appalachian State University practitioners for their technical advice and for
York College of Pennsylvania
consenting to interviews.
Sheila Viel
Jim Emig
University of Wisconsin—Milwaukee Sue Cosper
Villanova University
Dick Wasson FASB
Larry Falcetto Southwestern College
Emporia State University Tracy Golden
Suzanne Wright Deloitte LLP
Kim Hurt Pennsylvania State University
Central Community College John Gribble
Lori Zaher PricewaterhouseCoopers (retired)
Derek Jackson Bucks County Community College
St. Mary’s University of Minnesota Darien Griffin
Advisory Board S.C. Johnson & Son
Mark Kohlbeck
Florida Atlantic University Michael Lehman
We gratefully acknowledge the following mem-
Sun Microsystems, Inc.
Cynthia Lovick bers of the Intermediate Accounting Advisory
Austin Community College Board for their advice and assistance with this Michele Lippert
edition. Evoke.com
Kirk Lynch
Sandhills Community College Barbara Durham Sue McGrath
University of Central Florida Vision Capital Management
Anthony Masino
Pamela Graybeal David Miniken
East Tennessee University
University of Central Florida Sweeney Conrad
Jill Misuraca
Jeffery Hales
University of Tampa Robert Sack
Georgia Institute of Technology
University of Virginia
Barb Muller Melissa Larson
Arizona State University Brigham Young University—Provo Clare Schulte
Alison Parker Deloitte LLP
Ming Lu
Camosun College Santa Monica College Willie Sutton
Yvonne Phang Linda Matuszewski Mutual Community Savings Bank,
Borough of Manhattan Community College Northern Illinois University Durham, NC

Tim Potsaid Kevin Rich Lynn Turner

Madison, Wisconsin Marquette University former SEC Chief Accountant
Laura Prosser Angela Spencer Rachel Woods
Blackhills State University Oklahoma State University—Stillwater PricewaterhouseCoopers

Finally, we appreciate the exemplary support and professional
commitment given us by the development, marketing, produc-
tion, and editorial staffs of John Wiley & Sons, including the
following: Michael McDonald, Emily Marcoux, Lindsey Myers,
Elena Saccaro, and Wendy Lai. Thanks, too, to Denise Showers
and the staff at Aptara®, Inc. for their work on the text, and
the staff at Lumina Datamatics for their work on the solutions
manual.
We also appreciate the cooperation of the American
Institute of Certified Public Accountants and the Financial Ac-
counting Standards Board in permitting us to quote from their
pronouncements. We also acknowledge permission from the
American Institute of Certified Public Accountants, the Insti-
tute of Management Accountants, and the Institute of Inter-
nal Auditors to adapt and use material from the Uniform CPA
Examinations, the CMA Examinations, and the CIA Examina-
tions, respectively.
Suggestions and comments from users of this text will be
appreciated. Please feel free to e-mail any one of us.
Donald E. Kieso Jerry J. Weygandt Terry D. Warfield
Somonauk, Illinois Madison, Wisconsin Madison, Wisconsin
Table of Contents
1 Financial Accounting and What Do the Numbers Mean? Show Me the Earnings! 2-10
Basic Elements 2-13
Accounting Standards 1-1 Assumptions 2-14
Economic Entity Assumption 2-14
Exciting Times 1-2 What Do the Numbers Mean? Whose Company Is It? 2-15
Financial Reporting Environment 1-3 Going Concern Assumption 2-15
Accounting and Capital Allocation 1-4 Monetary Unit Assumption 2-15
What Do the Numbers Mean? It’s the Periodicity Assumption 2-16
Accounting 1-4 Measurement, Recognition, and Disclosure
Objective of Financial Reporting 1-4 Concepts 2-16
What Do the Numbers Mean? Don’t Forget Stewardship 1-5 Basic Principles of Accounting 2-16
The Need to Develop Standards 1-6 Cost Constraint 2-21
Parties Involved in Standard-Setting 1-7 Summary of the Structure 2-22
Securities and Exchange Commission (SEC) 1-7 What Do the Numbers Mean? Don’t Count These
American Institute of Certified Public Please 2-23
Accountants (AICPA) 1-8 FASB Codification and Exercises 2-37
Financial Accounting Standards Board (FASB) 1-9 IFRS Insights 2-38
Generally Accepted Accounting Principles 1-12
What Do the Numbers Mean? You Have to Step Back 1-12
FASB Codification 1-13 3 The Accounting ­Information
Major Challenges in Financial Reporting 1-14
GAAP in a Political Environment 1-14
System 3-1
Evolving Issue Fair Value, Fair Consequences? 1-15
Needed: A Reliable Information System 3-2
The Expectations Gap 1-16
Accounting Information System 3-3
Financial Reporting Issues 1-17
What Do the Numbers Mean? Hey, It’s Complicated 3-4
International Accounting Standards 1-18
Basic Terminology 3-4
What Do the Numbers Mean? Can You Do That? 1-19
Debits and Credits 3-5
Ethics in the Environment of Financial Accounting 1-19
The Accounting Equation 3-5
Conclusion 1-19
Financial Statements and Ownership Structure 3-7
FASB Codification and Exercises 1-28
The Accounting Cycle 3-8
IFRS Insights 1-28
Record and Summarize Basic Transactions 3-9
Journalizing 3-10
2 Conceptual Framework for Posting 3-10
Financial Reporting 2-1 What Do the Numbers Mean? Working on the Chain
Gang 3-12
What Is It? 2-1 Chart of Accounts 3-12
Conceptual Framework 2-3 The Recording Process Illustrated 3-13
Need for a Conceptual Framework 2-3 Trial Balance 3-18
What Do the Numbers Mean? What’s Your Adjusting Entries 3-19
Principle? 2-4 Types of Adjusting Entries 3-20
Development of a Conceptual Framework 2-4 Adjusting Entries for Deferrals 3-20
Overview of the Conceptual Framework 2-5 What Do the Numbers Mean? Am I Covered? 3-22
Basic Objective 2-6 Adjusting Entries for Accruals 3-24
Fundamental Concepts 2-6 Adjusted Trial Balance 3-30
Qualitative Characteristics of Accounting Information 2-6 Preparing Financial Statements 3-30
What Do the Numbers Mean? Living in a Closing 3-31
Material World 2-9 Post-Closing Trial Balance 3-34

xvi

Reversing Entries—An Optional Step 3-34
The Accounting Cycle Summarized 3-35
Financial Statements for a Merchandising Company 3-35
Income Statement 3-35
Retained Earnings Statement 3-36
Balance Sheet 3-36
What Do the Numbers Mean? Statements, Please 3-37
Closing Entries 3-38
Appendix 3A: Cash-Basis Accounting versus Accrual-Basis
 Accounting 3-38
Conversion from Cash Basis to Accrual Basis 3-40
Service Revenue Computation 3-41
Operating Expense Computation 3-41
Theoretical Weaknesses of the Cash Basis 3-43
Appendix 3B: Using Reversing Entries 3-43
Illustration of Reversing Entries—Accruals 3-43
Illustration of Reversing Entries—Deferrals 3-44
Summary of Reversing Entries 3-45
Appendix 3C: Using a Worksheet:
 The Accounting Cycle Revisited 3-46
Worksheet Columns 3-46
Trial Balance Columns 3-46
Adjustments Columns 3-46
Adjustments Entered on the Worksheet 3-48
Adjusted Trial Balance 3-48
Income Statement and Balance Sheet Columns 3-49
Preparing Financial Statements from a Worksheet 3-49
Analytics in Action 3-73
FASB Codification and Exercises 3-73
IFRS Insights 3-73
4 Income Statement and Related
Information 4-1
Financial Statements Are Changing 4-2
Income Statement 4-3
Usefulness of the Income Statement 4-3
Limitations of the Income Statement 4-4
Quality of Earnings 4-4
What Do the Numbers Mean? Some Things Never
Change 4-5
Content and Format of the Income Statement 4-6
Elements of the Income Statement 4-6
Intermediate Components of the Income Statement 4-7
What Do the Numbers Mean? Top Line or Bottom
Line? 4-9
Condensed Income Statements 4-9
Single-Step Income Statements 4-10
Reporting Various Income Items 4-11
Unusual and Infrequent Gains and Losses 4-12
Discontinued Operations 4-12
Noncontrolling Interest in Income 4-15
Earnings per Share 4-16
  Table of Contents xvii
What Do the Numbers Mean? Four: The Loneliest
Number 4-17
Summary of Various Income Items 4-18
Accounting Changes and Errors 4-18
Changes in Accounting Principle 4-19
Changes in Accounting Estimates 4-19
Corrections of Errors 4-20
Summary 4-20
Related Stockholders’ Equity Statements 4-21
Retained Earnings Statement 4-21
Comprehensive Income 4-22
Statement of Stockholders’ Equity 4-23
Balance Sheet Presentation 4-24
Evolving Issue Income Reporting 4-24
FASB Codification and Exercises 4-42
IFRS Insights 4-43
5 Balance Sheet and ­Statement
of Cash Flows 5-1
Hey, It Doesn’t Balance! 5-1
Balance Sheet 5-3
Usefulness of the Balance Sheet 5-3
Limitations of the Balance Sheet 5-4
What Do the Numbers Mean? Grounded 5-4
Classification in the Balance Sheet 5-5
What Do the Numbers Mean? “Show Me the Assets!” 5-11
What Do the Numbers Mean? Warning Signals 5-14
Preparation of the Balance Sheet 5-15
Account Form 5-15
Report Form 5-15
Statement of Cash Flows 5-16
What Do the Numbers Mean? Watch That Cash
Flow 5-17
Purpose of the Statement of Cash Flows 5-17
Content of the Statement of Cash Flows 5-18
Preparation of the Statement of Cash Flows 5-19
Usefulness of the Statement of Cash Flows 5-21
What Do the Numbers Mean? “There Ought to Be a
Law” 5-24
Additional Information 5-24
Notes to the Financial Statements 5-25
What Do the Numbers Mean? What About Your
Commitments? 5-26
Techniques of Disclosure 5-28
Evolving Issue Balance Sheet Reporting: Gross
or Net? 5-30
Appendix 5A: Ratio Analysis—A Reference 5-30
Using Ratios to Analyze Performance 5-30
Analytics in Action 5-57
FASB Codification and Exercises 5-58
IFRS Insights 5-58
xviii Table of Co ntents
6 Accounting and the Time
Value of Money 6-1
How Do I Measure That? 6-1
Basic Time Value Concepts 6-3
Applications of Time Value Concepts 6-3
The Nature of Interest 6-4
Simple Interest 6-4
Compound Interest 6-5
What Do the Numbers Mean? A Pretty Good Start 6-6
Fundamental Variables 6-8
Single-Sum Problems 6-8
Future Value of a Single Sum 6-9
Present Value of a Single Sum 6-10
Solving for Other Unknowns in Single-Sum Problems 6-12
Annuities (Future Value) 6-13
Future Value of an Ordinary Annuity 6-14
Future Value of an Annuity Due 6-16
What Do the Numbers Mean? Don’t Wait to Make That
Contribution! 6-17
Examples of Future Value of Annuity Problems 6-18
Annuities (Present Value) 6-20
Present Value of an Ordinary Annuity 6-20
What Do the Numbers Mean? Up in Smoke 6-21
Present Value of an Annuity Due 6-21
Examples of Present Value of Annuity Problems 6-23
Other Time Value of Money Issues 6-24
Deferred Annuities 6-24
Valuation of Long-Term Bonds 6-26
Effective-Interest Method of Amortization of Bond
Discount or Premium 6-27
Present Value Measurement 6-28
What Do the Numbers Mean? How Low Can They Go? 6-30
Analytics in Action 6-45
FASB Codification and Exercises 6-45
7 Cash and Receivables 7-1
Is Your Cash Trapped? 7-1
Cash 7-3
Reporting Cash 7-4
Summary of Cash-Related Items 7-5
Evolving Issue What Counts for Cash? 7-6
Receivables 7-7
Recognition of Accounts Receivable 7-8
Measurement of the Transaction Price 7-8
Variable Consideration 7-9
Valuation of Accounts Receivable 7-11
Direct Write-Off Method for Uncollectible Accounts 7-12
Allowance Method for Uncollectible Accounts 7-12
What Do the Numbers Mean? Please Release Me? 7-16
Notes Receivable 7-17
Recognition of Notes Receivable 7-17
Valuation of Notes Receivable 7-21
Other Issues 7-21
Fair Value Option 7-22
Disposition of Accounts and Notes Receivable 7-22
What Do the Numbers Mean? Securitizations—
Good or Bad? 7-27
Presentation and Analysis 7-27
What Do the Numbers Mean? I’m Still Waiting 7-30
Appendix 7A: Cash Controls 7-30
Using Bank Accounts 7-31
The Imprest Petty Cash System 7-31
Physical Protection of Cash Balances 7-32
Reconciliation of Bank Balances 7-33
Appendix 7B: Collectibility Assessment Based on
Expected Cash Flows 7-35
Measurement of Collectibility 7-36
Example 7-36
Recording Bad Debts 7-37
Analytics in Action 7-62
FASB Codification and Exercises 7-62
IFRS Insights 7-63
8 Valuation of Inventories:
A Cost-Basis Approach 8-1
To Switch or Not to Switch 8-2
Inventory Issues 8-3
Classification 8-3
Inventory Cost Flow 8-4
Inventory Control 8-6
What Do the Numbers Mean? Staying Lean 8-7
Determining Cost of Goods Sold 8-7
Goods and Costs Included in Inventory 8-7
Goods Included in Inventory 8-7
What Do the Numbers Mean? No Parking! 8-10
Costs Included in Inventory 8-10
What Do the Numbers Mean? You May Need a Map 8-12
Which Cost Flow Assumption to Adopt? 8-12
Specific Identification 8-13
Average-Cost 8-13
First-In, First-Out (FIFO) 8-14
Last-In, First-Out (LIFO) 8-15
Special Issues Related to LIFO  8-16
LIFO Reserve 8-16
What Do the Numbers Mean? Comparing Apples
to Apples 8-17
LIFO Liquidation 8-18
Dollar-Value LIFO  8-19
What Do the Numbers Mean? Quite a Difference 8-23
Comparison of LIFO Approaches 8-24
Major Advantages of LIFO  8-24
Major Disadvantages of LIFO  8-25

Basis for Selection of Inventory Method 8-26
Evolving Issue Repeal LIFO! 8-28
Effect of Inventory Errors 8-29
Ending Inventory Misstated 8-29
Purchases and Inventory Misstated 8-30
FASB Codification and Exercises 8-56
9 Inventories: Additional Valuation
Issues 9-1
Not What It Seems to Be 9-2
Lower-of-Cost-or-Net Realizable Value 9-3
Definition of Net Realizable Value 9-3
Illustration of LCNRV 9-4
Methods of Applying LCNRV 9-4
Recording NRV Instead of Cost 9-5
Use of an Allowance 9-6
Use of an Allowance—Multiple Periods 9-6
What Do the Numbers Mean? I’ll Trade You 9-7
Lower-of-Cost-or-Market 9-7
How Lower-of-Cost-or-Market Works 9-9
Methods of Applying Lower-of-Cost-or-Market 9-10
Evaluation of the LCNRV and Lower-of-Cost-or-Market
Rules 9-10
What Do the Numbers Mean? “Put It in Reverse” 9-11
Other Valuation Approaches 9-11
Valuation at Net Realizable Value 9-11
Valuation Using Relative Sales Value 9-12
Purchase Commitments—A Special Problem 9-13
The Gross Profit Method of Estimating Inventory 9-15
Computation of Gross Profit Percentage 9-16
Evaluation of Gross Profit Method 9-17
What Do the Numbers Mean? The Squeeze 9-18
Retail Inventory Method 9-18
Retail-Method Concepts 9-19
Retail Inventory Method with Markups and
Markdowns—Conventional Method 9-20
Special Items Relating to Retail Method 9-22
Evaluation of Retail Inventory Method 9-23
What Do the Numbers Mean? Mark Me 9-24
Presentation and Analysis 9-24
Presentation of Inventories 9-24
Analysis of Inventories 9-25
Appendix 9A: LIFO Retail Methods 9-26
Stable Prices—LIFO Retail Method 9-26
Fluctuating Prices—Dollar-Value LIFO Retail Method 9-27
Subsequent Adjustments Under Dollar-Value
 LIFO Retail 9-29
Changing from Conventional Retail to LIFO  9-29
Analytics in Action 9-53
FASB Codification and Exercises 9-53
IFRS Insights 9-54
  Table o f Contents xix
10 Acquisition and ­Disposition
of Property, Plant,
and Equipment 10-1
Watch Your Spending 10-2
Property, Plant, and Equipment 10-3
Acquisition of Property, Plant, and Equipment 10-4
Cost of Land 10-4
Cost of Buildings 10-5
Cost of Equipment 10-5
What Do the Numbers Mean? Robbing Peter to Pay Paul 10-5
Self-Constructed Assets 10-6
Interest Costs During Construction 10-6
Qualifying Assets 10-7
Capitalization Period 10-8
Amount to Capitalize 10-8
Comprehensive Example of interest Capitalization 10-9
What Do the Numbers Mean? What’s in Your Interest? 10-11
Special Interests Related to Interest Capitalization 10-11
Observations 10-12
Valuation of Property, Plant, and Equipment 10-12
Cash Discounts 10-12
Deferred-Payment Contracts 10-13
Lump-Sum Purchases 10-14
Issuance of Stock 10-14
Exchanges of Nonmonetary Assets 10-15
Other Asset Valuation Methods 10-19
Costs Subsequent to Acquisition 10-20
What Do the Numbers Mean? Disconnected 10-20
Additions 10-21
Improvements and Replacements 10-21
Rearrangement and Reinstallation 10-22
Repairs 10-23
Summary of Costs Subsequent to Acquisition 10-23
Disposition of Property, Plant, and Equipment 10-24
Sale of Plant Assets 10-24
Involuntary Conversion 10-24
Miscellaneous Problems 10-25
Appendix 10A: Accounting for Contributions 10-25
Conditional Contribution 10-26
Unconditional Contribution 10-27
Exchange Transactions 10-27
FASB Codification and Exercises 10-52
11 Depreciation, Impairments,
and Depletion 11-1
Here Come the Write-Offs 11-2
Depreciation—A Method of Cost Allocation 11-3
Factors Involved in the Depreciation Process 11-4
What Do the Numbers Mean? Alphabet Dupe 11-5
Methods of Depreciation 11-6
xx Table o f Co ntents
Special Depreciation Methods and Other Issues 11-9
Special Depreciation Methods 11-9
What Do the Numbers Mean? Decelerating
Depreciation 11-11
Other Depreciation Issues 11-11
What Do the Numbers Mean? Depreciation Choices 11-14
Impairments 11-14
Recognizing Impairments 11-14
Measuring Impairments 11-15
Restoration of Impairment Loss 11-16
Impairment of Assets to Be Disposed Of 11-16
Depletion 11-17
Establishing a Depletion Base 11-17
Write-Off of Resource Cost 11-18
Estimating Recoverable Reserves 11-19
What Do the Numbers Mean? Reserve Surprise 11-20
Liquidating Dividends 11-20
Continuing Controversy 11-20
Evolving Issue Full-Cost or Successful-Efforts? 11-21
Presentation and Analysis 11-22
Presentation of Property, Plant, Equipment,
and Natural Resources 11-22
Analysis of Property, Plant, and Equipment 11-23
Appendix 11A: Income Tax Depreciation 11-25
Modified Accelerated Cost Recovery System 11-25
Tax Lives (Recovery Periods) 11-25
Tax Depreciation Methods 11-26
Example of MACRS 11-26
Optional Straight-Line Method 11-27
Tax versus Book Depreciation 11-27
What Do the Numbers Mean? In the Bonus
(Boomerang?) 11-28
Analytics in Action 11-49
FASB Codification and Exercises 11-49
IFRS Insights 11-50
12 Intangible Assets 12-1
Is This Sustainable? 12-1
Intangible Asset Issues 12-3
Characteristics 12-3
Valuation 12-4
Amortization of Intangibles 12-4
What Do the Numbers Mean? Are All Brands the Same? 12-6
Types of Intangible Assets 12-6
Marketing-Related Intangible Assets 12-6
What Do the Numbers Mean? Keep Your Hands
 Off My Intangible! 12-7
Customer-Related Intangible Assets 12-7
Artistic-Related Intangible Assets 12-8
Contract-Related Intangible Assets 12-8
Technology-Related Intangible Assets 12-9
What Do the Numbers Mean? Patent Battles 12-10
What Do the Numbers Mean? The Value
of a Secret Formula 12-11
Goodwill 12-11
Impairment and Presentation of Intangible Assets 12-14
Impairment of Limited-Life Intangibles 12-14
Impairment of Indefinite-Life Intangibles Other Than
Goodwill 12-15
Impairment of Goodwill 12-16
Impairment Summary 12-17
What Do the Numbers Mean? Impairment Ups and
Downs 12-17
Presentation of Intangible Assets 12-18
Research and Development Costs 12-19
Identifying R&D Activities 12-19
Accounting for R&D Activities 12-20
Costs Similar to R&D Costs 12-21
What Do the Numbers Mean? Branded 12-23
Presentation of Research and Development Costs 12-23
Evolving Issue Recognition of R&D and Internally
Generated Intangibles 12-24
Analytics in Action 12-42
FASB Codification and Exercises 12-42
IFRS Insights 12-43
13 Current Liabilities and
Contingencies 13-1
Now You See It, Now You Don’t 13-2
Current Liabilities 13-3
Accounts Payable 13-4
Notes Payable 13-4
Dividends Payable 13-6
Customer Advances and Deposits 13-6
Unearned Revenues 13-6
What Do the Numbers Mean? Microsoft’s Liabilities—Good
or Bad? 13-7
Sales Taxes Payable 13-8
Income Taxes Payable 13-8
Employee-Related Liabilities 13-9
What Do the Numbers Mean? How Do You Want That? 13-13
Current Maturities of Long-Term Debt 13-14
Short-Term Obligations Expected to Be Refinanced 13-15
What Do the Numbers Mean? Going, Going, Gone 13-15
Refinancing Illustration 13-15
What Do the Numbers Mean? What About That Short-Term
Debt? 13-16
Contingencies 13-17
Gain Contingencies 13-17
Loss Contingencies 13-18
What Do the Numbers Mean? Frequent Flyers 13-24
Evolving Issue Greenhouse Gases: Let’s Be
Standard-Setters 13-26
What Do the Numbers Mean? More Disclosure, Please 13-27
   Table o f Contents xxi

Presentation and Analysis 13-28 Components of Stockholders’ Equity 15-5

Presentation of Current Liabilities 13-28 Issuance of Stock 15-6
Presentation of Contingencies 13-29 What Do the Numbers Mean? The Case of the Disappearing
Analysis of Current Liabilities 13-30 Receivable 15-9
What Do the Numbers Mean? I’ll Pay You Later 13-32 Preferred Stock 15-10
Analytics in Action 13-53 What Do the Numbers Mean? A Class (B) Act 15-12
FASB Codification and Exercises 13-53 Reacquisition of Shares 15-12
IFRS Insights 13-54 Purchase of Treasury Stock 15-14
Sale of Treasury Stock 15-15
14 Long-Term Liabilities 14-1
Retiring Treasury Stock 15-16
What Do the Numbers Mean? Buybacks—Good
or Bad? 15-16
Going Long 14-1
Dividend Policy 15-17
Bonds Payable 14-3
Financial Condition and Dividend Distributions 15-17
Issuing Bonds 14-3
Types of Dividends 15-18
Types of Bonds 14-4
Stock Dividends and Stock Splits 15-21
What Do the Numbers Mean? All About Bonds 14-4
What Do the Numbers Mean? Splitsville 15-23
Valuation and Accounting for Bonds Payable 14-5
Presentation and Analysis of Stockholders’ Equity 15-25
What Do the Numbers Mean? How’s My Rating? 14-8
Presentation 15-25
Effective-Interest Method 14-9
Analysis 15-27
Extinguishment of Debt 14-13
Appendix 15A: Dividend Preferences and Book Value
Economic Substance 14-13
per Share 15-29
Illustration 14-13
Dividend Preferences 15-29
What Do the Numbers Mean? Your Debt Is Killing My Equity 14-14
Book Value per Share 15-30
Long-Term Notes Payable 14-14
Analytics in Action 15-51
Notes Issued at Face Value 14-15
FASB Codification and Exercises 15-52
Notes Not Issued at Face Value 14-15
IFRS Insights 15-52
Special Notes Payable Situations 14-17
Mortgage Notes Payable 14-20
Reporting and Analyzing Liabilities 14-20 16 Dilutive Securities and Earnings
Fair Value Option 14-20 per Share 16-1
What Do the Numbers Mean? Fair Value Fun House 14-21
Off-Balance-Sheet Financing 14-22 Kicking the Habit 16-1
What Do the Numbers Mean? Obligated 14-23 Dilutive Securities 16-3
Presentation and Analysis of Long-Term Debt 14-24 Debt and Equity 16-3
What Do the Numbers Mean? How About Accounting for Convertible Debt 16-3
a 100-Year Bond? 14-26 Convertible Preferred Stock 16-5
Appendix 14A: Troubled-Debt Restructuring 14-26 What Do the Numbers Mean? How Low Can You Go? 16-6
Settlement of Debt 14-27 Stock Warrants 16-6
Transfer of Assets 14-27 Stock Warrants Issued with Other Securities 16-7
Granting of Equity Interest 14-28 Rights to Subscribe to Additional Shares 16-9
Modification of Terms 14-28 Evolving Issue Is That All Debt? 16-9
Example 1—No Gain for Debtor 14-29 Stock Compensation Plans 16-10
Example 2—Gain for Debtor 14-31 Measurement—Stock Compensation 16-11
Concluding Remarks 14-33 What Do the Numbers Mean? What’s
FASB Codification and Exercises 14-51 the Debate About? 16-12
IFRS Insights 14-52 Recognition—Stock Compensation 16-13
Restricted Stock 16-14
15 Stockholders’ Equity 15-1 Employee Stock-Purchase Plans 16-16
Disclosure of Compensation Plans 16-16
It’s a Global Market 15-1 Basic Earnings per Share 16-18
Corporate Capital 15-3 Earnings per Share—Simple Capital Structure 16-19
Corporate Form 15-3 Comprehensive Example 16-21
What Do the Numbers Mean? 1209 North Orange Street 15-3 Diluted Earnings per Share 16-22
xxii Table of Contents
Diluted EPS—Convertible Securities 16-23
Diluted EPS—Options and Warrants 16-25
Contingent Issue Agreement 16-26
Antidilution Revisited 16-26
EPS Presentation and Disclosure 16-27
Summary of EPS Computation 16-29
What Do the Numbers Mean? Pro Forma EPS
Confusion 16-30
Appendix 16A: Accounting for Stock-Appreciation
 Rights 16-30
SARs—Share-Based Equity Awards 16-31
SARs—Share-Based Liability Awards 16-31
Stock-Appreciation Rights Example 16-32
Appendix 16B: Comprehensive Earnings per Share
Example 16-33
Diluted Earnings per Share 16-34
FASB Codification and Exercises 16-57
IFRS Insights 16-58
17 Investments 17-1
Winners and Losers 17-1
Investments in Debt Securities 17-2
Debt Investment Classifications 17-3
Held-to-Maturity Securities (Amortized Cost) 17-4
Available-for-Sale Securities (Fair Value Through Other
Comprehensive Income) 17-6
Trading Securities (Fair Value Through Net Income) 17-10
What Do the Numbers Mean? To Have and to Hold 17-11
Investments in Equity Securities 17-11
Holdings of Less Than 20% 17-12
Holdings Between 20% and 50% (Equity Method) 17-14
Holdings of More Than 50% (Consolidation) 17-16
What Do the Numbers Mean? Who’s in Control
 Here? 17-16
Other Financial Reporting Issues 17-17
Fair Value Option 17-17
Evolving Issue Fair Value Controversy 17-18
Impairment of Value 17-18
Reclassification Adjustments 17-21
Transfers Related to Debt Securities 17-24
Summary of Reporting Treatment of Securities 17-25
What Do The Numbers Mean? So You Think
It Is Easy? 17-26
Appendix 17A: Accounting for Derivative
 Instruments 17-26
Defining Derivatives 17-27
Who Uses Derivatives, and Why? 17-27
Producers and Consumers 17-27
Speculators and Arbitrageurs 17-28
Basic Principles in Accounting for Derivatives 17-29
Example of Derivative Financial Instrument—
Speculation 17-29
Differences Between Traditional and Derivative Financial
Instruments 17-31
Derivatives Used for Hedging 17-32
What Do the Numbers Mean? Risky Business 17-33
Fair Value Hedge 17-33
Cash Flow Hedge 17-35
Other Reporting Issues 17-37
Embedded Derivatives 17-37
Qualifying Hedge Criteria 17-38
Summary of Derivatives Accounting 17-39
Comprehensive Hedge Accounting Example 17-40
Fair Value Hedge 17-40
Financial Statement Presentation of an Interest
Rate Swap 17-42
Controversy and Concluding Remarks 17-43
Appendix 17B: Fair Value Disclosures 17-43
Disclosure of Fair Value Information: Financial
 Instruments 17-44
Disclosure of Fair Values: Impaired Assets or
 Liabilities 17-46
Conclusion 17-47
FASB Codification and Exercises 17-70
IFRS Insights 17-71
18 Revenue Recognition 18-1
It’s Back 18-1
Fundamentals of Revenue Recognition 18-3
Background 18-3
New Revenue Recognition Standard 18-4
Overview of the Five-Step Process: Boeing Example 18-4
Extended Example of the Five-Step Process:
BEAN 18-5
The Five-Step Process Revisited 18-9
Identifying the Contract with Customers—Step 1 18-9
Identifying Separate Performance Obligations—
Step 2 18-10
Determining the Transaction Price—Step 3 18-11
Allocating the Transaction Price to Separate Performance
 Obligations—Step 4 18-15
Recognizing Revenue When (or as) Each Performance
 Obligation Is Satisfied—Step 5 18-17
Summary 18-18
Accounting for Revenue Recognition Issues 18-19
Sales Returns and Allowances 18-19
Repurchase Agreements 18-22
Bill-and-Hold Arrangements 18-24
Principal-Agent Relationships 18-24
Consignments 18-25
What Do the Numbers Mean? Grossed Out 18-27
Warranties 18-27
Nonrefundable Upfront Fees 18-29
Summary 18-29

Presentation and Disclosure 18-30
Presentation 18-30
Disclosure 18-34
Evolving Issue Revenue: “It’s Like An Octopus” 18-35
Appendix 18A: Long-Term Construction Contracts 18-36
Revenue Recognition over Time 18-36
Percentage-of-Completion Method 18-37
Completed-Contract Method 18-42
Long-Term Contract Losses 18-43
Appendix 18B: Revenue Recognition for Franchises 18-46
Franchise Accounting 18-47
Recognition of Franchise Rights Revenue
over Time 18-49
FASB Codification and Exercises 18-76
19 Accounting for Income Taxes 19-1
Taxes Are A-Changing 19-1
Fundamentals of Accounting for Income Taxes 19-3
Future Taxable Amounts and Deferred Taxes 19-4
What Do the Numbers Mean? “Real Liabilities” 19-8
Future Deductible Amounts and Deferred Taxes 19-8
What Do the Numbers Mean? “Real Assets” 19-11
Deferred Tax Asset—Valuation Allowance 19-11
Additional Considerations 19-12
Income Statement Presentation 19-12
Specific Differences 19-13
Tax Rate Considerations 19-16
What Do the Numbers Mean? Global Tax Rates 19-17
What Do the Numbers Mean? Lower Tax Rate—Good
or Bad? 19-18
Accounting for Net Operating Losses 19-18
Loss Carryforward 19-19
Loss Carryforward Example 19-19
What Do the Numbers Mean? NOLs: Good News or
Bad? 19-23
Financial Statement Presentation 19-23
Balance Sheet 19-23
Note Disclosure 19-24
What Do the Numbers Mean? Imagination at Work 19-25
Income Statement 19-26
Evolving Issue Uncertain Tax Positions 19-28
The Asset-Liability Method 19-28
Appendix 19A: Comprehensive Example of Interperiod
 Tax Allocation 19-30
First Year—2019 19-30
Taxable Income and Income Taxes Payable—2019 19-31
Computing Deferred Income Taxes—End of 2019 19-31
Deferred Tax Expense (Benefit) and the Journal
Entry to Record Income Taxes—2019 19-32
Financial Statement Presentation—2019 19-33
Second Year—2020 19-34
Taxable Income and Income Taxes Payable—2020 19-34
  Table of Contents xxiii
Computing Deferred Income Taxes—End of 2020 19-35
Deferred Tax Expense (Benefit) and the Journal Entry to
Record Income Taxes—2020 19-35
Financial Statement Presentation—2020 19-36
Appendix 19B: Accounting for Net Operating Loss
Carrybacks 19-36
Loss Carryback 19-37
Loss Carryback Example 19-37
Loss Carryback with Carryforward 19-38
FASB Codification and Exercises 19-59
IFRS Insights 19-60
20 Accounting for Pensions and
Postretirement ­Benefits 20-1
Where Have All the Pensions Gone? 20-2
Fundamentals of Pension Plan Accounting 20-3
Defined Contribution Plan 20-4
Defined Benefit Plan 20-5
What Do the Numbers Mean? Which Plan
Is Right for You? 20-6
The Role of Actuaries in Pension Accounting 20-6
Measures of the Liability 20-7
What Do the Numbers Mean? Roller Coaster 20-8
Components of Pension Expense 20-9
Using a Pension Worksheet 20-11
2020 Entries and Worksheet 20-12
Funded Status 20-13
Prior Service Cost (PSC) 20-13
Amortization 20-14
2021 Entries and Worksheet 20-15
Gains and Losses 20-17
Smoothing Unexpected Gains and Losses on Plan
Assets 20-17
What Do the Numbers Mean? Pension Costs Ups and
Downs 20-18
Smoothing Unexpected Gains and Losses on the Pension
Liability 20-18
Corridor Amortization 20-18
Evolving Issue Bye Bye Corridor 20-21
2022 Entries and Worksheet 20-21
2023 Entries and Worksheet—A Comprehensive
Example 20-23
Reporting Pension Plans in Financial Statements 20-25
Assets and Liabilities 20-25
Net Income 20-26
Comprehensive Income 20-27
Within the Notes to the Financial Statements 20-28
Special Issues 20-31
What Do the Numbers Mean? Who Guarantees the
Guarantor? 20-32
Concluding Observations 20-34
xxiv Table o f Contents
Appendix 20A: Accounting for Postretirement
Benefits 20-34
Accounting Guidance 20-34
Differences Between Pension Benefits and Healthcare
Benefits 20-35
What Do the Numbers Mean? OPEBs—How Big Are
They? 20-36
Postretirement Benefits Accounting Provisions 20-36
Obligations Under Postretirement Benefits 20-36
Postretirement Expense 20-37
Illustrative Accounting Entries 20-38
2020 Entries and Worksheet 20-38
Recognition of Gains and Losses 20-39
2021 Entries and Worksheet 20-40
Amortization of Net Gain or Loss in 2022 20-41
Disclosures in Notes to the Financial Statements 20-41
Actuarial Assumptions and Conceptual Issues 20-43
What Do the Numbers Mean? Want Some Bad News? 20-43
FASB Codification and Exercises 20-67
IFRS Insights 20-68
21 Accounting for Leases 21-1
Times Are A-Changing 21-1
The Leasing Environment 21-3
A Look at the Lessee 21-3
Advantages of Leasing—Lessees 21-4
A Look at the Lessor 21-4
Advantages of Leasing—Lessors 21-5
What Do the Numbers Mean? Residual Value Regret 21-6
Conceptual Nature of a Lease 21-6
Finance and Operating Leases (Lessee) 21-7
Lease Classification 21-7
Accounting for Finance Leases 21-11
Lessee Accounting for Finance Leases: An Example 21-11
Lessor Accounting for Sales-Type Leases 21-14
What Do the Numbers Mean? Not So Fast 21-15
Sales-Type Lease Example 21-16
Accounting for Operating Leases 21-18
Lessee Accounting for Operating Leases 21-18
Lessor Accounting for Operating Leases 21-21
Special Lease Accounting Problems 21-22
Residual Values 21-23
Other Lease Adjustments 21-27
Bargain Purchase Options 21-29
Short-Term Leases 21-30
Presentation, Disclosure, and Analysis 21-30
Evolving Issue Bring It On! 21-34
Appendix 21A: Sale-Leasebacks 21-35
Accounting Issues in Sale-Leaseback Transactions 21-35
Sale Transaction 21-36
Financing Transaction (Failed Sale) 21-36
Sale-Leaseback Example 21-37
Appendix 21B: Direct Financing Lease
(Lessor) 21-39
Direct Finance Lease Accounting 21-39
Direct Financing Lease Example 21-40
Appendix 21C: Comprehensive Examples 21-44
Lease Terms: Scenario 1 21-44
Lease Classification 21-44
Accounting for Finance Lease 21-45
Lease Terms: Scenario 2 21-46
Lease Classification 21-47
Lessee Accounting—Operating Lease 21-47
Lessor Accounting—Operating Lease 21-50
FASB Codification and Exercises 21-79
IFRS Insights 21-80
22 Accounting Changes
and Error Analysis 22-1
In the Dark 22-2
Accounting Changes 22-3
Background 22-3
Changes in Accounting Principle 22-4
What Do the Numbers Mean? Quite a Change 22-5
What Do the Numbers Mean? Change Management 22-7
Impracticability 22-14
Other Accounting Changes 22-15
Changes in Accounting Estimates 22-16
What Do the Numbers Mean? Why Now? 22-18
Changes in Reporting Entity 22-18
Accounting Errors 22-19
What Do the Numbers Mean? Can I Get My Money
Back? 22-20
Example of Error Correction 22-20
Summary of Accounting Changes and Correction
of Errors 22-22
What Do the Numbers Mean? What’s Your
Motivation? 22-24
Error Analysis 22-24
Balance Sheet Errors 22-25
Income Statement Errors 22-25
Balance Sheet and Income Statement Errors 22-25
Comprehensive Example: Numerous Errors 22-28
What Do the Numbers Mean? Guard the Financial
Statements! 22-30
Preparation of Financial Statements with Error
Corrections 22-31
Appendix 22A: Changing from or to the Equity
Method 22-33
Change from the Equity Method 22-33
Dividends in Excess of Earnings 22-33
Change to the Equity Method 22-34
FASB Codification and Exercises 22-60
IFRS Insights 22-61

23 Statement of Cash Flows 23-1
Show Me the Money! 23-1
Statement of Cash Flows 23-3
Usefulness of the Statement of Cash Flows 23-3
Classification of Cash Flows 23-4
What Do the Numbers Mean? How’s My
Cash Flow? 23-5
Format of the Statement of Cash Flows 23-6
Preparing the Statement of Cash Flows 23-6
Illustrations—Tax Consultants Inc. 23-7
What Do the Numbers Mean? Earnings and Cash Flow
Management? 23-9
Sources of Information for the Statement of
Cash Flows 23-17
Net Cash Flow from Operating Activities—Direct
Method 23-17
Evolving Issue Direct versus Indirect 23-22
Special Problems in Statement Preparation 23-24
Adjustments to Net Income 23-24
Accounts Receivable (Net) 23-27
What Do the Numbers Mean? Not What It Seems 23-29
Other Working Capital Changes 23-29
Net Losses 23-30
Significant Noncash Transactions 23-31
What Do the Numbers Mean? Better Than ROA? 23-32
Use of a Worksheet 23-32
Preparation of the Worksheet 23-34
Analysis of Transactions 23-37
Preparation of Final Statement 23-40
FASB Codification and Exercises 23-69
IFRS Insights 23-70
24 Full Disclosure in ­Financial
Reporting 24-1
High-Quality Financial Reporting—Always in Fashion 24-2
Full Disclosure Principle 24-3
Increase in Reporting Requirements 24-4
Differential Disclosure 24-5
Evolving Issue Disclosure—Quantity and Quality 24-6
Notes to the Financial Statements 24-6
What Do the Numbers Mean? Footnote Secrets 24-8
Disclosure Issues 24-8
Related Parties 24-8
  Table of Contents xxv
Post-Balance-Sheet Events (Subsequent Events) 24-9
Reporting for Diversified (Conglomerate)
Companies 24-11
Interim Reports 24-15
Evolving Issue It’s Faster but Is It Better? 24-20
Auditor’s and Management’s Reports 24-21
Auditor’s Report 24-21
What Do the Numbers Mean? Heart of the Matter 24-24
Management’s Reports 24-24
Current Reporting Issues 24-26
Fraudulent Financial Reporting 24-26
Internet Financial Reporting 24-29
Reporting on Financial Forecasts and Projections 24-30
What Do the Numbers Mean? Global Forecasts 24-31
Criteria for Making Accounting and Reporting
Choices 24-31
Appendix 24A: Basic Financial Statement Analysis 24-32
Perspective on Financial Statement Analysis 24-32
Ratio Analysis 24-33
Limitations of Ratio Analysis 24-35
Comparative Analysis 24-36
Percentage (Common-Size) Analysis 24-37
FASB Codification and Exercises 24-58
IFRS Insights 24-59
A p p e ndix A Private Company Accounting A-1
The Private Company Council (PCC) A-1
Background on the PCC A-1
Private Company Decision-Making Framework A-1
PCC Accomplishments A-2
Private Company Alternatives for Intangible Assets
and Goodwill A-2
Accounting for Identifiable Intangible Assets A-2
Accounting for Goodwill A-4
Summary A-6
Specimen Financial Statements:
A p p e ndix B  
The Procter & Gamble Company B-1
Specimen Financial Statements:
A p p e ndix c  
The Coca-Cola Company C-1
Specimen Financial Statements:
A p p e ndix D  
PepsiCo, Inc. D-1
Specimen Financial Statements:
A p p e ndix E  
Marks and Spencer plc E-1
Index I-1
 CHAPTER 1
© andersphoto/Shutterstock

Financial Accounting and

Accounting Standards
LEARNING OBJECTIVES
After studying this chapter, you should be able to:

1. Describe the financial reporting environment. 4. Describe major challenges in the financial reporting
2. Identify the major policy-setting bodies and their environment.
role in the standard-setting process.
3. Explain the meaning of generally accepted
accounting principles (GAAP) and the role of the
Codification for GAAP.

PREVIEW OF CHAPTER 1 As the following opening story indicates, the U.S. system
of financial reporting has long been the most robust and transparent in the world. However, This chapter also includes
to ensure that it continues to provide the most relevant and reliable financial information numerous conceptual and
global discussions that are
to users, a number of financial reporting issues must be resolved. These issues include such
integral to the topics
matters as evaluating global standards, increasing fair value reporting, and meeting multiple presented here.
user needs. This chapter explains the environment of financial reporting and the many factors
affecting it, as follows.

FINANCIAL ACCOU N TI N G A N D ACCOU N TI N G STA N DA RD S

Financial Reporting Parties Involved in Generally Accepted Major Challenges in

Environment Standard-Setting Accounting Principles Financial Reporting
• Accounting and • Securities and Exchange • FASB Codification • Political environment
capital allocation Commission • Expectations gap
• Objective of • American Institute of • Financial reporting
financial reporting CPAs issues
• Need to develop • Financial Accounting • International
standards Standards Board accounting standards
• Ethics

1-1
Another random document with
no related content on Scribd:
No tan presto Arsiano diera fin á
su canción si no sintiera venir por
la parte del río un gran tropel de
pastores, y escondióse entre lo
más espesso de los árboles;
esperó lo que sería, y vido llegar
al lugar mismo donde él antes
estaba á Sasio con su lira, á
Ergasto con la flauta y á Fronimo
con el rabel, y templando los
instrumentos, después de haber
tañido un rato, al mismo son
Liardo comenzó á cantar
aquestos versos, tomando
principio desta canción ajena:

LIARDO
Donde sobra el merecer,
aunque se pierda la vida
bien perdida no es perdida.
Tal ganancia hay que
desplace
y tal perder que es ganar,
que á todo suele bastar
la forma con que se hace;
de tal arte satisface
nuestro valor á mi vida,
que perdida no es perdida.
La vanagloria de verme
morir en vuestro servicio
será el mayor beneficio
que el vivir puede hacerme;
para pagar el valerme
quiero yo poner la vida,
do perdida no es perdida.
 De lo que el Amor ha hecho
no puedo llamarme á engaño,
que si fué en la vida el daño,
en la muerte está el provecho;
si de trance tan estrecho
se aparta y libra la vida,
es perdida y más perdida.
Ser la vida despreciada
si en la muerte no se cobra,
bien se conoce que es obra
sobrenatural causada;
á vos sola es otorgada
tal potestad en la vida,
si es perdida ó no es perdida.

Mal se les hace esta noche á los

nuevos amantes su propósito,
que si Arsiano fué impedido, á la
primera canción de Liardo, Liardo
lo fué de la misma suerte, porque
apercibiéndose para la segunda,
de la parte del soto comenzó á
sonar una flauta y tamborino, y
esperando quien fuesse llegó
Damón, que era el que tañía, y
con él Barcino y Colin, grandes
apassionados de Dinarda. Poco
se les dió que los demás pastores
estuviessen junto á la cabaña,
antes llegándose á ellos, Barcino
los desafió á bailar, y Fronimo
(que no era menos presumido)
salió al desafío, y aunque al
principio comenzaron á nombrar
grandes precios en su apuesta, al
cabo acordaron que se bailasse la
honra. Pusieron por juez á Sasio,
y aguardando que passasse una
nube que les impedía la luna,
apenas mostró su cara clara y
redonda cuando Fronimo
comenzó un admirable
zapateado, que el tamborino tenía
que hacer en alcanzalle: acabó
con una vuelta muy alta y
zapateta en el aire que fué
solenizada de todos; y á la hora
Barcino, que ya tenía las haldas
en cinta y las mangas á los
codos, entró con gentil compas
bailando, y á poco rato comenzó
unas zapatetas salpicadas; luego
fué apresurando el son con
mudanzas muchas y muy nuevas,
y cuando quiso acabar tomó un
boleo en el aire con mayor fuerza
que maña de arte, que por caer
de pies cayó de cabeza. Su dolor
y el polvo y la risa de los pastores
fué causa de correrse Barcino, de
manera que si Sasio no le
animara se alborotara la fiesta, y
pidiéndole que juzgasse les dixo
que sabían que el premio era la
honra, y el uno la había hallado
en el aire y el otro en el polvo,
que pues assí era toda la del
mundo, ambos quedaban muy
honrados. A este tiempo ya
Arsiano se había mezclado con
ellos, cansando de estar
escondido, y viéndose juntos
Sasio y él, unas veces ellos
cantando y otras Damón tañendo,
passaron la mayor parte de la
noche. ¿Deseó saber si
Amarantha y Dinarda los oían?
Sí, sin duda, porque Dinarda
acostumbrada estaba á oirlos; y
Amarantha, aunque triste, no por
esso sería desconversable. Idos
los pastores, las dos volvieron á
sus consejas, que desde el
principio de la noche las tenían
comenzadas: su resolución fué
que Amarantha se viesse con
Finea y á Arsiano se le
encomendasse que buscase á
Alfeo donde quiera que
estuviesse. Con esto (saliendo de
la cabaña) vieron los más altos
montes coronados del vecino sol,
y oyeron las aves del día
saludando la nueva mañana.
Todo para Amarantha era tristeza
y desconsuelo, y no sé si igual la
gana de hallar á Alfeo y de ver á
Finea. En fin, los dos, sin más
compañía, enderezaron á su
cabaña, donde la hallaron no tan
alegre como otras veces
pudieran; pero dissimulando lo
más que pudo, las recibió con
gracioso semblante. Era discreta
Finea y no menos hermosa, y
assí se lo pareció á Amarantha, y
le dixo en viéndola: Muy hermosa
eres, serrana. Al menos muy
serrana, dixo Finea. La condición,
dixo Amarantha, no sé yo si lo es,
mas la cara de sierra. Lo uno y lo
otro, dixo Finea, fué criado entre
las peñas do apenas las aves
hacen nidos. ¿Y quién te truxo
acá? dixo Amarantha. Quien te
podría llevar allá, dixo Finea. De
esso me guardaré yo, dixo
Amantha; pero dime, serrana,
¿dónde está Alfeo? Como es
grande, dixo Finea, para traerle
en la manga, no te lo sabré decir.
A estar de gana, dixo Amarantha,
gustara de la respuesta; pero
dime, serrana, ¿sabes cómo es
Alfeo fugitivo? No, dixo Finea;
pero sé que la causa de serlo le
podría desculpar. Essa, dixo
Amarantha, yo te la diré: testigo
me es el cielo que no se la dí;
porque si dexé de acudir á su
contento no fué por falta de
voluntad, sino por más no poder:
y cuando pude ya no le hallé, y
agora cansada de esperarle,
olvidé honra y vida, y, como ves,
le vengo á buscar: pues no será
razón que tú me usurpes mi
contento. Yo, dixo Finea, muy
poca parte soy para esso; hombre
es Alfeo que sabrá dar cuenta de
sí y tú mujer que acertarás á
tomársela; quiérate él pagar las
deudas que publicas, que yo os
serviré de balde á entrambos. Por
más cierto tengo, dixo Amarantha,
serviros yo á los dos; pero ya que
no te hallas parte para lo que he
dicho, seilo siquiera para que yo
le hable. Haz tú lo que yo hago,
dixo Finea, cuando quiero verle, y
no habrás menester rogar á
nadie. ¿Qué haces? dixo
Amarantha. Búscole, dixo Finea,
hasta que lo hallo. Yo estimo en
mucho el consejo, dixo
Amarantha, y assí le pienso
tomar; adiós, serrana. Adiós,
pastora, dixo Finea, y
quedándose en su cabaña, ellas
guiaron á la de Siralvo, donde
entendieron hallar á Alfeo; pero
como allá llegaron, Siralvo muy
cortésmente las recibió y les dió
la entrada franca, para que se
assegurassen de que no estaba
allí. Ya en esto iba el veneno
creciendo en el pecho de
Amarantha, porque estaba muy
fiada que en viéndola Alfeo sería
lo que ella quisiesse; y como veía
que este medio le iba faltando, la
paciencia también le faltó, y
vuelta á la cabaña con Dinarda,
soltó la rienda al llanto y al dolor,
sin ser parte Dinarda para su
consuelo, ni la continuación de
muchos caudalosos pastores que,
vencidos de su beldad, de mil
maneras procuraban su contento.
Assí passaron algunos días sin
que Alfeo saliesse donde ella le
pudiesse ver; pero pareciéndole
que el encerramiento iba muy
largo, determinó de salir con
licencia de Finea, que aunque
temerosa de la hermosura de
Amarantha, pudo más la
confianza de su amador. Muchas
veces Amarantha y Alfeo se
toparon y estuvieron á razones
solos y acompañados; pero
siempre Finea llevo la mejor
parte, y no por esso Amarantha
cessaba en su porfía. ¡Oh
cuántas veces se arrepintió de su
mal término passado, y cuántas
quisiera que se abriera la tierra y
la tragara! Tal andaba Amarantha,
que muchas veces se quiso dar la
muerte, y tal andaba Arsiano por
su amor, que á sólo ella se podía
comparar: que aunque otros
muchos comenzaron, ninguno
con las veras que él prosiguió. Yo
le vi una vez (entre otras) solo
con ella en la ribera, tan
desmayado y perdido que quise
llegar á darle ayuda, pero cuando
volvió en sí, viendo los ojos de la
hermosa pastora que (en nombre
de Alfeo) vertían abundantes
lágrimas, sacó la flauta y al son
della con gran ternura les dixo:

ARSIANO
Ojos bellos, no lloréis,
si mi muerte no buscáis,
pues de mi alma sacáis
las lágrimas que vertéis.
Esse licor que brotando,
 de vuestra lumbre serena,
va la rosa y azucena
del claro rostro bañando,
ojos bellos, no penséis
que es agua que derramáis,
sino sangre que sacáis
de esta alma que allá tenéis.
Ya que el ajeno provecho
me hace á mí daño tanto,
al menos templad el llanto,
ya que vivís en mi pecho;
si no con él sacaréis
las entrañas donde estáis,
pues dellas mismas sacáis
las lágrimas que vertéis.
De aquestas gotas que veo,
la más pequeña que sale,
si se compara, más vale
que todo vuestro deseo.
Ya yo veo que tenéis
pena de lo que lloráis
y culpa, pues derramáis
lágrimas que no debéis.
Ojos llenos de alegría,
entended que no es razón
que otro lleve el galardón,
de la fe, que es sola mía;
agraviad, si vos queréis,
al alma que enamoráis,
mas mirad que si lloráis,
alma y vida acabaréis.

Palabras eran éstas con que

Amarantha se pudiera enternecer
si no tuviera toda su ternura
sujeta á tan diferente causa; mas
ahora no hicieron en ella más que
en los peñascos duros. ¡Oh, gran
tirano de la humana libertad! ¿Es
possible que, siendo Amor,
permitas que uno muera
deseando lo que otro desecha, y
que sea tan flaco el hombre que
no sólo se rinda, pero te dé lazos
con que le ates, armas con que le
hieras y veneno con que le
atosigues las heridas? Rómpase
el cielo y caya una ley que borre
todas las tuyas; no venga escrita,
que perecerá, sino de mano
oculta se imprima en tu voluntad,
para que con solo un ñudo ates
dos corazones, y cuando se
rompiere, ambos se suelten, que
quedar uno riendo y otro llorando
no es reliquia de amistad, sino de
mortal desafío; mas, ¿cuándo
podrá cumplirse este deseo? Assí
te hallamos y assí te dexaremos,
Amor. Bien poco ha que vimos á
Alfeo morir por Andria, á Finea
por Orindo, Silvia por Celio,
Filardo por Filena, y á Filena y
Pradelio amándose tan contentos.
Pues mirad del arte que están
ahora: Alfeo y Finea se aman, y
Andria llora: Silvia y Filardo,
amigos; Celio olvidado; Pradelio y
Filena combatidos de irreparable
tempestad, donde la fe de Filena
y la ventura de Pradelio, con el
agua á la boca, miserablemente
se van anegando. Llevó el cruel
destino á la cabaña de Filena á
Mireno, rico y galán pastor, en
fuerte punto para Pradelio, porque
enamorado della y continuando
su morada, y persuadido de
Lirania, deudo suyo, y de la
persona y hacienda de Mireno,
Pradelio iba á mal andar, y cada
día peor, pero con un corazón
valeroso dissimulaba su mal.
Pues como llegasse el día que se
celebraba la fiesta de la casta
Diana, donde se habían de juntar
los pastores de la ribera y las
ninfas de los montes, ríos y
selvas, Pradelio la noche antes,
solo al pie de un roble, estaba
enajenado de sí, cuando un buho
puesto sobre el árbol, con su
canto llenó de amargura el pecho
del pastor, y queriéndose alentar
cantando, los grillos no le daban
lugar; y no eran grillos, que en el
temblor de la voz los hubiera
conocido, y si alacranes fueran,
en el silbo breve lo pudiera
entender, y si abejarrones, en el
ruido prolongado; donde creyó
Pradelio que el son estaba en sus
oídos, y retirado á su cabaña,
llegaron sus mastines mordidos
de los lobos, y calentando sus
zagales aceites para curarlos, la
cabaña se comenzó á quemar. En
reparar estos daños se passó la
noche, aunque el principal no
tenía reparo. Y ya que aparecía la
hermosa mañana, más benigno el
cielo, oyó Pradelio el son de dos
suaves instrumentos acordados,
una lira y un rabel, y atentamente
escuchando, conoció ser los
pastores Bruno y Turino, que á
poco rato que tañeron, sobre
estas dos letras ajenas
comenzaron assí á cantar á su
propósito:

TURINO
Sembré el Amor de mi
mano,
pensando haber galardón,
y cogí de cada grano
mil manojos de passión.
Aré con el pensamiento
y sembré con fe sincera
semillas que no debiera,
llevar la lluvia ni el viento;
reguélo invierno y verano
con agua del corazón,
y cogí de cada grano
mil manojos de passión.
Era la tierra morena,
que el buen fruto suele dar,
y cuando quise segar
halléla de abrojos llena;
probéla á escardar en vano,
y bajé la presunción,
y cogí de cada grano
mil manojos de passión.
Torné de nuevo á rompella,
por ver si me aprovechaba,
y cuando el fruto assomaba,
vino borrasca sobre ella,
que quiso el Tiempo tirano
que no llegasse á sazón,
y cogí de cada grano
mil manojos de passión.
Aunque ella vaya faltando,
no ha de faltar la labor,
que como buen labrador,
pienso morir trabajando;
todo se me hace llano
por tan valida intención,
aunque me dé cada grano
mil manojos de passión.

BRUNO
Con Amor, niño rapaz,
ni burlando ni de veras
os pongáis á partir peras
si queréis la pascua en paz.
Por verle niño pensáis
que está la vitoria llana,
burláis dél entre semana,
mas la fiesta lo pagáis.
Convertíseos ha el solaz
en fatigas lastimeras.
Sobre el partir de las peras
perderéis sossiego y paz.
Yo me vi que Amor andaba
tras robarme la intención,
y mirando la ocasión
dél y della me burlaba;
fué mi confianza el haz
donde encendió sus hogueras,
el fuego el partir las peras
y la ceniza mi paz.
Prometióme sus contentos,
 y al fin vencióme el cruel,
y fuí perdido tras él.
Cuando me daba tormentos,
llamóme y fuí pertinaz
á las demandas primeras,
una vez partimos peras
y mil me quitó la paz.
Ya que estoy desengañado
tan á propia costa mía,
su tristeza ó su alegría
no se arrime á mi cuidado;
para las burlas capaz,
inútil para las veras,
otro le compre sus peras,
que yo más quiero paz.

Tanta fué la dulzura con que los

pastores dixeron sus cantares,
que Pradelio suspendió un poco
su tristeza, y con pesar de que
tan presto acabassen, salió á
ellos y con mucha cortesía,
sentándose entre los dos, les
pidió que tornassen á su canto, y
ellos, con no menos amor, se lo
otorgaron, y con otras dos letras
viejas tornaron á su intención,
como primero.

TURINO
¿En qué puedo ya esperar,
pues á mis terribles daños
no los cura el passar años
ni mudanza de lugar?
Para el dolor, que camina
con mayor furia y poder,
tiempo ó lugar suelen ser
la más cierta medicina;
todo ha venido á faltar,
en el rigor de mis daños,
porque crecen con los años
sin respeto de lugar.
Siendo el tiempo mi
enemigo,
¿cómo querrá defenderme?
¿Qué lugar ha de valerme,
si me llevo el mal conmigo?
Bien puedo desesperar
de remedio de mis daños,
aunque gastasse mil años
en mudanza de lugar.
No hay tan cierta perdición
como la que es natural,
ni enemigo más mortal
que el que está en el corazón;
pues, ¿qué tiempo ha de
bastar
para reparar mis daños,
si son propios de mis años
y es el alma su lugar?
No está en el lugar la pena
ni tiene el tiempo la culpa;
mi ventura los desculpa,
y ella misma me condena;
la voluntad ha de estar
enterneciendo mis daños,
pues aunque passen más
años,
serán siempre en un lugar.

BRUNO
 No me alegran los placeres
ni me entristece el pesar,
porque se suelen mudar.
Los gustos en su venida
tengo por cosa passada,
porque es siempre su llegada
víspera de su partida,
y en la gloria más cumplida
menos se puede fiar,
porque se suele mudar.
Puede el pesar consolarme
cuando viene más terrible,
porque sé que es impossible
no acabarse ó acabarme,
y aunque más piense matarme
no pienso desesperar,
parque se suele mudar.

En la perseverancia del tiempo,

verdad cantó Turino, que después
que él amaba á Filis, el tercer
planeta cuatro veces había
rodeado el quinto cielo, y en la
mudanza del lugar lo mismo,
porque después, si os acordáis,
que estos dos pastores otra vez
cantaron en compañía de Elisa,
Filis y Galafrón, Mendino y
Castalio, á la orilla de un arroyo,
Turino, con despecho y dolor se
ausentó de la ribera: pero viendo
que el mal no cesaba aún y el
remedio se hacía más impossible,
volviosse al Tajo y allí passaba su
vida amargamente, siempre en
compañía de Bruno, que aunque
eran tan diversos en aquella
opinión, en todas las demás se
conformaban, y por la mayor
parte los hallaban por la soledad
de los campos ó los montes,
huyendo Turino de cansar á Filis y
temiendo Bruno hallar otra que la
pareciesse, pues agora, como la
mañana se declaró, Pradelio,
forzado de ir á la fiesta de Diana,
con agradables razones se
despidió destos amigos, y
confuso y lastimoso,
considerando el mal que tenía
entre manos, tomó el camino por
una fresca arboleda de pobos y
chopos y otras plantas, donde las
mañanas muchos paxarillos
solían, dulcemente cantando,
alegrar á quien passaba; mas
entonces, en señal de
descontento, sin parecer ave que
blanca fuesse; las verdes ramas,
que de unos con otros árboles
solían apaciblemente abrazarse,
estaban apartadas y sin hoja, de
suerte que el sol pudiera hallar
entrada y con sus rayos calentar
las aguas de un manso arroyo,
que desde el Tajo por entre ellos
corría, todo en señal de la
desventura de Pradelio, el cual,
assí caminando, oyó cantar á la
celosa Amarantha, cuya dulzura
enamoraba el cielo y parecía que
con tal deleite se iba clarificando;
mas ella que vió al pastor,
vergonzosa y turbada, dexó
colgar al cuello la zampoña con
que á ratos tañía, y assí á un
tiempo cessó su son y su canto;
pero Pradelio, necessitando de
entretener su mal de cualquier
suerte, llegándose á ella, le dixo:
Hermosa Amarantha, assí el cielo
te haga tan venturosa como gentil
y discreta, que no cesse tu
comenzado canto; antes tornando
á él muestres tu grande amor y la
mudanza de Alfeo, porque ya
todos sabían los casos destos
pastores, y ella, vencida del dolor,
sin guardar la ley de su respeto,
como un pastor aficionado usaba
de libertad en sus querellas, y
assí Pradelio se atrevió á pedirle
que cantasse á propósito desta
historia, y ella, que no era menos
cortés que enamorada, sin más
ruego comenzó á tocar su
zampoña, tras cuyo son
suavemente dixo assí sus males:

AMARANTHA
Agua corriente serena,
que desde el Castalio coro
vienes descubriendo el oro
de entre la menuda arena,
y haces con la requesta
del verde y florido atajo,
parecer que está debajo
una agradable floresta.
Más bella y regocijada
en otras aguas me vi;
ya no me conozco aquí
según me hallo trocada,
y assí no pienso ponerme
á mirar en ti mi arreo,
pues cual era no me veo
y cual soy no quiero verme.
De mi parte estaba Amor
cuando me dexó mortal,
no vive más el leal
de lo que quiere el traidor;
vendióseme por amigo,
fuéme señalando gloria
y hizo de mi vitoria
triunfo para mi enemigo.
No quiero bien ni esperanza
de quien á mi costa sé
que tuvo en menos mi fe
que el gusto de su mudanza;
pero en tanto mal me place
que se goce en mi tormento,
si puede tener contento
quien lo que no debe hace.
Contigo hablo, alevoso
Amor, que si tal no fueras,
de mis ojos te escondieras
de ti mismo vergonzoso;
mas en daño tan sin par
claro se deja entender,
que el que lo pudo hacer
lo sabrá dissimular.
Querrás quizá condenarme,
que merezco mi passión;
pues sabes bien la razón,
consiénteme disculparme:
quise amar y ser amada,
pero fortuna ordenó
que la fe que me sobró
me tenga ya condenada.
¿Quién juzgará las
centellas,
dime, Alfeo, en que vivías,
viendo ya las brasas mías
y á ti tan helado en ellas?
Tempestad fué tu dolor,
menos que en agua la sal,
pues no quedó de tu mal
cosa que parezca Amor.
Dime qué hice contigo,
ó lo que quieres que haga,
pues en lugar de la paga
me das tan duro castigo.
Tu voluntad se me cierra
cuando me ves que me allano;
¿tu corazón es serrano
que assí se inclina á la sierra?
No tengo celos de ti,
ni tu desamor se crea
que es por amar á Finea,
mas por desamarme á mí;
quejarme della no quiero
porque tú me vengarás,
que presto la dexarás
si no te dexa primero.
¡Mas, ay, que un tigre
sospecho
que en mis entrañas se cría,
que las rasga y las desvía
y las arranca del pecho,
y un gusano perezoso
carcome mi corazón,
y yo canto al triste son
de su diente ponzoñoso!
Y confieso que algún día
 me sobró la confianza,
mas si no hice mudanza
perdonárseme debía;
muera quien quiera morir,
y como lloro llorar,
que en esto suele parar
el demasiado reir.
Sólo aquel proverbio quiero
por consuelo en mi quebranto,
pues en tan contino llanto
le hallo tan verdadero:
las abejuelas, de flor
jamás tuvieron hartura,
ni el ganado de verdura,
ni de lágrimas Amor.

Los tiernos metros de la pastora

Amarantha no sólo á Pradelio
dieron contento, pero á otros
muchos que le escucharon, y por
no atajalla, apartados del manso
arroyo por entre las plantas se
iban deteniendo; al fin de los
cuales llegaron á la falda de un
fresco montecillo, donde el sitio
de Diana comenzaba. Y en él
vieron al pastor Alfeo que, en
compañía de otros caminaba al
templo de la diosa; aquí quedó la
vencida Amarantha casi muerta,
sin alzar los ojos de la tierra dixo:
Mucho quisiera, pastor,
acompañarte y dar á Diana los
debidos loores, pero ya ves cuán
mal se me ha ordenado; pues yo
no puedo vivir donde Alfeo
estuviere, aunque él sea mi