Case 1.11worldcom

Question 1 The definition of assets is in FASB model Statement 6, paragraph 25 Assets are probable prospective stinting wellbeings obtained or controlled by a particular entity as a effect of past transactions or events.Paragraph 26 then describes the trio of characteristics that curtail an item as an asset an asset has three essential characteristics (a) it embodies a probable future benefit that involves a power, singly or in combination with other assets, to contribute directly or indirectly to future net cash inflows, (b) a particular entity can obtain the benefit and control others access to it, and (c) the transaction or other event cock-a-hoop rise to the entitys right to or control of the benefit has already occurred.Question 2 The capitalized line cost were operate expenses and should not have been inured like a capital asset. On the one hand, one of WorldComs study operating expenses was its so-called line costs. These were fees paid to third party telecommunicat ions interlocking providers for the right to access the third parties networks. Under GAAP (Generally Accepted business relationship Principles), these fees cannot be capitalized.They must be taken as immediate expenses and subtracted from income. On the other hand, the increased line cost lies in the long-term, fixed-rate leases for network capacity WorldCom initiated in order to meet the anticipated increase in client demand. And as later the demand was not as expected, the Company has to tolerate for the leases that were substantially underutilized to avoid punitive termination provisions.The line costs that WorldCom capitalized were ongoing, operating expenses that accounting rules required WorldCom to recognize immediately. Instead of expense the cost currently, WorldCom capitalized it to overdraw its pre-tax income. Future economic benefit is the essence of an asset. WorldCom capitalized excess capacity costs that were not generating revenue, which violates GAAP. Expense o r a loss would be recognize upon evidence that previously recognized asset benefits would not be realized.