Exam case financial accounting Essay

Solutions to Exercises and Problems tutorial 1 IFMCase 2-2Case 2-2 SKD Limited1.GoodwillThere is no goodwill amortization expense in coarse A, so the goodwill amortization expense recognized by SKD must be added spikelet to determine income under Country A GAAP. SKD amortizes goodwill over a longer period (20 forms) than is allowed in Country B (5 years), so an additional sum of goodwill amortization expense must be recognized to determine income under Country B GAAP, which reduces Country B GAAP income. b.The goodwill modification affects the retained earnings in stockholders beauteousness. The increase in Country A GAAP income resolves 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 fairness is cumulative. The fact that the stockholders fairness adjustment is three times as larger as the income adjustment implies t hat the goodwill was purchased three year ago.2.Capitalized Interesta.The adjustment labeled Capitalized hobby relates to the interest that is not expensed but instead is capitalized under Country A GAAP. The adjustment labeled Depreciation related to capitalized interest relates to the derogation of the interest that was capitalized as spark off 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 disparagement expense. c.Both income adjustments are closed aside to retained earnings and partially offset one another. The increase to income of $50 and the decrease of $20 result in a profit increase in retained earnings of $30.3.Fixed Assetsa.When fixed assets are re placed to a higher a mount, there is an increase in their carrying value with an offsetting increase in stockholders equity to keep the balance shroud 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 recapitulation 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 induce been $64 ($64 8 = $56) because only one year of additional deprecation would be include in the stockholders equity adjustment. 27. Holzer Compa ny Property, Plant, and Equipment (capitalization of acquire be and measurement of asset subsequent to acquisition use two alternative models)IAS 16 toll Model act asset on the balance sheet at cost little 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%)$90,000Interest 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 buildingConstruction costs$1,000,000Capitalized interest50,000Total initial cost of building$1,050,000Annual depreciation (beginning in Year 2) ($1,050,000 / 40 years) $26,250Year 1Year 2Year 3Year 4Year 5Income StatementDepreciation expense$0$26,250$26,250$26,250$26,250 equilibrise Sheet edifice (at 1/1)$0$1,050,000$1,023,750$99 7,500$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$945,000IAS 16 Revaluation ModelCarry 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%)$90,000Interest to be capitalized in Year 1 ($500,000 x 10%)50,000 Interest expense in Year 1$40,000Cost of buildingConstruction costs$1,000,000Capitalized interest50,000Total initial cost of building$1,050,000Annual depreciation (beginning in Year 2) ($1,050,000 / 40 years) $26,250Year 1Year 2Year 3Year 4Year 5Income StatementDepreciation expense$0$26,250$26,250$25,5262$25,526Subtotal $0$26,250$26,250$25,526$25,526 impairment on revaluation27,500Reversal of revaluation loss(27,500)Total expense (income)$0$26,250$43,750$25,526$(1,974)Balance SheetBuilding (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)1Reversal of revaluation loss27,5003Revaluation surplus 3,5523Building (at 12/31)$1,050,000$1,023,750$970,000 $944,474$950,0001At December 31,Year 3, the fair value of the building is determined to be $970,000. The carrying value of the building is decrease 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.