Question1. You work as an accountant for a small land development company which desperately requires additional financing to continue in business. The president of your company is meeting with the manager of the local bank at the end of the month to try to acquire this financing. The president has approached you with two ideas to enhance the company’s reported financial position. First, he claims that because a big part of company’s value comes from its knowledgeable and dedicated employees, you must report their Intellectual Abilities as an asset on the balance sheet. Second, he claims that though the local economy is doing poorly and almost no one is buying land or new houses, he is optimistic that eventually things will turn around. For this purpose, he asks you to continue reporting the company’s land on the balance sheet at its cost, rather than the much lower amount that real estate appraisers say it’s really worth.
Required: Comment on the following questions. Why do you think the president is so concerned with amount of assets reported on balance sheet? What accounting concept relates to the presidents first suggestion to report Intellectual Abilities as asset? What accounting concept relates to the presidents second suggestion to continue reporting land at its cost? Who may be hurt by the presidents’ submissions, if you were to do as he asks? What should you do?