Communication Case 3–3

FASB codification research; inventory or property, plant, and equipment

The Red Hen Company produces, processes, and sells fresh eggs. The company is in the process of preparing financial statements at the end of its first year of operations and has asked for your help in determining the appropriate treatment of the cost of its egg-laying flock. The estimated life of a laying hen is approximately two years, after which they are sold to soup companies.

The controller considers the company’s operating cycle to be two years and wants to present the cost of the egg-producing flock as inventory in the current asset section of the balance sheet. He feels that the hens are “goods awaiting sale.” The chief financial officer does not agree with this treatment. He thinks that the cost of the flock should be classified as property, plant, and equipment because the hens are used in the production of product—the eggs.

The focus of this case is the balance sheet presentation of the cost of the egg-producing flock. Your instructor will divide the class into two to six groups depending on the size of the class. The mission of your group is to reach consensus on the appropriate presentation.

Required:

1. Each group member should deliberate the situation independently and draft a tentative argument prior to the class session for which the case is assigned.

2. In class, each group will meet for 10 to 15 minutes in different areas of the classroom. During that meeting, group members will take turns sharing their suggestions for the purpose of arriving at a single group treatment.

3. After the allotted time, a spokesperson for each group (selected during the group meetings) will share the group’s solution with the class. The goal of the class is to incorporate the views of each group into a consensus approach to the situation.