Lottery Ticket Case II Solution
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 the FASB concepts cases.)
Phil N. Tropic bought a lottery ticket to participate in a drawing by a local charity. His motive for the purchase is not clear since the purchase may have been made for a chance to win $100-$100,000 or to support a local charity.
3. List of Alternative Ways to Report the Transaction
List all approaches that have reasonable merit. The objective is to be complete without listing alternatives that are obviously without merit. In developing alternatives, you will often find it helpful to think in terms of i) alternative times when the transaction could be recorded (recognition) and ii) alternative ways to measure the amounts at each time (measurement). (Do not provide journal entries, although you may find it helps you to develop them on scrap paper.)
a. Expense the $150 immediately.
b. Record an asset for $150 now and then expense the $150 after the drawing.
c. Record an asset for the market value in the secondary market, say $90, and expense the remaining $60 immediately. Expense the $90 after the drawing.
d. Record an asset for the expected value of $100 (($100,000 / 10,000) + ((10,000/10,000) * 10) + ((1000/10,000) * 100) + ((300/10,000) * 1,000) + ((100/10,000) * 4000) and expense $50 immediately. Expense the $100 after the drawing.
4.
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 the FASB concepts cases.)
Phil N. Tropic bought a lottery ticket to participate in a drawing by a local charity. His motive for the purchase is not clear since the purchase may have been made for a chance to win $100-$100,000 or to support a local charity.
3. List of Alternative Ways to Report the Transaction
List all approaches that have reasonable merit. The objective is to be complete without listing alternatives that are obviously without merit. In developing alternatives, you will often find it helpful to think in terms of i) alternative times when the transaction could be recorded (recognition) and ii) alternative ways to measure the amounts at each time (measurement). (Do not provide journal entries, although you may find it helps you to develop them on scrap paper.)
a. Expense the $150 immediately.
b. Record an asset for $150 now and then expense the $150 after the drawing.
c. Record an asset for the market value in the secondary market, say $90, and expense the remaining $60 immediately. Expense the $90 after the drawing.
d. Record an asset for the expected value of $100 (($100,000 / 10,000) + ((10,000/10,000) * 10) + ((1000/10,000) * 100) + ((300/10,000) * 1,000) + ((100/10,000) * 4000) and expense $50 immediately. Expense the $100 after the drawing.
4.