Five-Step Approach to Unstructured Problems
1. Succinct Statement of the Financial Reporting Issue(s)
Provide a brief statement of the accounting issue that includes the characteristics of the transaction that introduce uncertainty about how to record it.
How should an expenditure, in this instance to purchase a lottery ticket, which has a risk of providing no future cash flows be reported?
2. Brief Summary of the Economic Purpose of the Transaction
State the reason corporate management has entered into the transaction, or, alternatively, summarize the event that has led to the reporting controversy. (This can be difficult in some practice cases but is usually obvious in ...view middle of the document...
Expense the $100 after the drawing.
4. Neutral Discussion of the Major Alternatives, Citing Relevant Authoritative Literature and Theoretical Concepts
Discuss the merits for and against each of the alternative ways to report the transaction listed in the previous step. Cite authoritative accounting rules (from the conceptual framework or practice literature) and specific facts of the case that help you apply the rules. If you have developed a long list of alternatives in step 3, you may be able to eliminate some of them without a detailed analysis (but state reasons). This is the longest section of your analysis.
Alternatives a and b (from step 3) are closely related so I will discuss them together in applying the recognition criteria. A critical aspect in determining whether the $150 is an asset or contribution expense is whether the benefit is viewed as i) the chance to receive $100-$100,000 or ii) the right to participate in the drawing. These alternatives assume that Phil plans to keep the ticket and participate in the lottery.
Under view i), the probability of receiving $100-$100,000 is a probable future economic event since the chances of winning a prize are greater than 50%. Although the FASB doesn’t require a 50% chance to be probable, the fact that the odds are greater than 50% is favorable. With regard to control, he has paid in full for the ticket but he has no control over the outcome of the drawing. Control is thereby questionable. Finally, since Phil has purchased the ticket, a past transaction has occurred. In sum, the lottery ticket should be accounted for as an asset because the transaction meets the requirements.
Under view ii), the probability of participating in the drawing is very high because United Charities has a past history of meeting the sales target required to go forward with the drawing. Any (intangible) economic benefits Phil receives from participating in the drawing are probable. Phil owns the ticket so he controls the right to participate in the drawing. Phil has purchased the ticket, so a past transaction has occurred. As a result, the entire $150 should be...