Exam case financial accounting Essay

Solutions to Exercises and Problems Tutorial 1 IFM Case 2-2 Case 2-2 SKD Limited 1.Goodwill There is no goodwill amortization expense in Country A, so the goodwill amortization expense recognized by SKD must be added back to determine income under Country A GAAP. SKD amortizes goodwill over a longer period (20 years) than is allowed in Country B (5 years), so an additional amount of goodwill amortization expense must be recognized to determine income under Country B GAAP, which reduces Country B GAAP income. b.The goodwill adjustment affects the retained earnings in stockholders’ equity. The increase in Country A GAAP income results in an increase in retained earnings and the decrease in Country B GAAP income results in a decrease in retained earnings. c.The adjustment to income is for the current year only. The adjustment to stockholders’ equity is cumulative. The fact that the stockholders’ equity adjustment is three times as larger as the income adjustment implies that the goodwill was purchased three year ago. 2.Capitalized Interest a.The adjustment labeled â€Å"Capitalized interest† relates to the interest that is not expensed but instead is capitalized under Country A GAAP. The adjustment labeled â€Å"Depreciation related to capitalized interest† relates to the depreciation of the interest that was capitalized as part of the cost of the asset. b.The first adjustment increases income because interest is not being expensed immediately but instead is capitalized as part of the cost of the asset to which it relates. The second adjustment decreases income because under Country A GAAP, the asset to which interest is capitalized has a larger cost and therefore a larger depreciation expense. c.Both income adjustments are closed out to retained earnings and partially offset one another. The increase to income of $50 and the decrease of $20 result in a net increase in retained earnings of $30. 3.Fixed Assets a.When fixed assets are revalued to a higher amount, there is an increase in their carrying value with an offsetting increase in stockholders’ equity to keep the balance sheet in balance. The amount by which the assets are revalued is subject to depreciation, which results in a larger depreciation expense. The adjustment to recognize this additional depreciation expense decreases income under Country B GAAP. It also decreases stockholders’ equity (retained earnings). The decrease in retained earnings from additional depreciation is smaller than the increase in stockholders’ equity from revaluation of assets, which results in a net increase in stockholders’ equity. Note: if we knew when the fixed assets were revalued, we could determine the amount by which they were revalued. For example, if revaluation occurred at the end of the previous year, then the revaluation amount must have been $64 ($64 – 8 = $56) because only one year of additional deprecat ion would be included in the stockholders’ equity adjustment. 27. Holzer Company – Property, Plant, and Equipment (capitalization of borrowing costs and measurement of asset subsequent to acquisition using two alternative models) IAS 16 Cost Model Carry asset on the balance sheet at cost less accumulated depreciation and any accumulated impairment losses. Capitalize borrowing costs borrowing costs attributable to the construction of qualifying assets. Annual interest ($900,000 x 10%)$90,000 Interest to be capitalized in Year 1 ($500,000* x 10%)50,000 Interest expense in Year 1$40,000 * Expenditures of $1,000,000 were made evenly throughout the year, so the average accumulated expenditures during the year are $500,000 ($1,000,000 / 2). Cost of building: Construction costs$1,000,000 Capitalized interest50,000 Total initial cost of building$1,050,000 Annual depreciation (beginning in Year 2) ($1,050,000 / 40 years) $26,250 Year 1Year 2Year 3Year 4Year 5 Income Statement Depreciation expense$0$26,250$26,250$26,250$26,250 Balance Sheet Building (at 1/1)$0$1,050,000$1,023,750$997,500$971,250 Depreciation(26,250)(26,250)(26,250)(26,250) Building (at 12/31)$1,050,000$1,023,750$997,500$971,250$945,000 IAS 16 Revaluation Model Carry asset on the balance sheet at revalued amount equal to fair value less any subsequent accumulated depreciation and any accumulated impairment losses. Capitalize borrowing costs attributable to the construction of qualifying assets. Annual interest ($900,000 x 10%)$90,000 Interest to be capitalized in Year 1 ($500,000 x 10%)50,000 Interest expense in Year 1$40,000 Cost of building: Construction costs$1,000,000 Capitalized interest50,000 Total initial cost of building$1,050,000 Annual depreciation (beginning in Year 2) ($1,050,000 / 40 years) $26,250 Year 1Year 2Year 3Year 4Year 5 Income Statement Depreciation expense$0$26,250$26,250$25,5262$25,526 Subtotal $0$26,250$26,250$25,526$25,526 Loss on revaluation27,500 Reversal of revaluation loss(27,500) Total expense (income)$0$26,250$43,750$25,526$(1,974) Balance Sheet Building (at 1/1)$0$1,050,000$1,023,750$970,000$944,474 Depreciation(26,250)(26,250)(25,526)(25,526) Building (at 12/31)$1,050,000$1,023,750$997,500$944,474$918,948 Loss on revaluation(27,500)1 Reversal of revaluation loss27,5003 Revaluation surplus 3,5523 Building (at 12/31)$1,050,000$1,023,750$970,000 $944,474$950,000 1At December 31,Year 3, the fair value of the building is determined to be $970,000. The carrying value of the building is decreased by $27,500, with a loss on revaluation recognized in Year 3 net income. 2 Depreciation in Year 4 is $25,526 ($970,000 / 38 remaining years). 3At December 31,Year 5, the fair value of the building is determined to be $950,000. The carrying value of the building is increased by $31,052. A reversal of revaluation loss of $27,500 is recognized in income and $3,552 ($31,052 – 27,500) is recorded as revaluation surplus in shareholders’ equity.