Professional research: FASB Codification – Kleckner Company

Professional research: FASB CodificationKleckner Company started operations in 2010. Although it hasgrown steadily, the company reported accumulated operating losses of $450,000in its first four years in business. In the most recent year (20140, Klecknerappears to have turned the corner and reported modest taxable income of$30,000. In addition to a deferred tax asset related to its net operating loss,Kleckner has recorded a deferred tax related to product warranties and adeferred tax liability related to accelerated depreciation.Given its past operating results, Kleckner has established afull valuation allowance for its deferred tax assets. However, given itsimproved performance, Kleckner management wonders whether the company can nowreduce or eliminate the valuation allowance. They would like you to conductsome research on the accounting for its valuation allowance.Instructions(a) Briefly explain to Kleckner management theimportance of future taxable income as it relates to the valuation allowancefor deferred tax assets.(b) What are the sources of income that may be reliedupon to remove the need for a valuation allowance?Professional research: FASB CodificationDaniel Hardware Co. is consideringalternative financing arrangements for equipment used in its warehouses.Besides purchasing the equipment outright, Daniel is also considering a lease.Accounting for the outright purchase is fairly straightforward, but becauseDaniel has not used equipment leases in the past, the accounting staff is lessinformed about the specific accounting rules for leases.The staff is aware of some leaserules related to a “90 percent of fair value,” “75 percent of useful life”, and“residual value deficiencies,” but they are unsure about the meanings of theseterms in lease accounting. Daniel has asked you to conduct some research onthese items related to lease capitalization criteria.Instructions(a) What is the objective of lease classificationcriteria?(b) An important element of evaluating leases isdetermining whether substantially all of the risks and rewards of ownership aretransferred in the lease. How is “substantially all” defined in theauthoritative literature?(c) A common issue in the accounting for leasesconcerns lease requirements that the lessee make up a residual value deficiencythat is attributable to damage, extraordinary wear and tear, or excessive usage(e.g., excessive mileage on a leased vehicle). Do these features constitute alessee guarantee of the residual value such that the estimated residual value ofthe leased property at the end of the lease term should be included in minimumlease payments? Explain.