Essay on Lottery Ticket Case Ii Solution

1047 Words Nov 18th, 2013 5 Pages
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
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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 recorded as an asset when the asset is viewed as the right to participate in the drawing.

The alternative of recording an asset for market value in the secondary market, say $90, is supported if Phil has the intention of selling the ticket before the drawing. In this instance, the $90 is a probable future economic event, given his intention to sell. He has control over this benefit as long as an active secondary market develops, and past history says this has happened in recent years. And Phil has purchased the ticket, so a past transaction has occurred. In this situation, he should record an asset of $90 and expense the other $60 as a contribution expense.

Note that, although United Charities has reserved the right to cancel the drawing, the chances of a refund from cancellation are very unlikely based on past history. A refund would support an asset of $150, but I have not developed the merits of this alternative. I have not developed…

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