Chapter 4

Case 4-1
Bessrawl Corporation
Bessrawl Corporation is a U.S.-based company that prepares its consolidated fi –
nancial statements in accordance with U.S. GAAP. The company reported income
in 2014 of $1,000,000 and stockholders’ equity at December 31, 2014, of $8,000,000.
The CFO of Bessrawl has learned that the U.S. Securities and Exchange Commission
is considering requiring U.S. companies to use IFRS in preparing consolidated
fi nancial statements. The company wishes to determine the impact that
a switch to IFRS would have on its fi nancial statements and has engaged you to
prepare a reconciliation of income and stockholders’ equity from U.S. GAAP to
IFRS. You have identifi ed the following fi ve areas in which Bessrawl’s accounting
principles based on U.S. GAAP differ from IFRS.
1. Inventory
2. Property, plant, and equipment
3. Intangible assets
4. Research and development costs
5. Sale-and-leaseback transaction
Bessrawl provides the following information with respect to each of these accounting
differences.

Accounting

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Inventory
At year-end 2014, inventory had a historical cost of $250,000, a replacement cost
of $180,000, a net realizable value of $190,000, and a normal profi t margin of
20 percent.
Property, Plant, and Equipment
The company acquired a building at the beginning of 2013 at a cost of $2,750,000.
The building has an estimated useful life of 25 years, an estimated residual value
of $250,000, and is being depreciated on a straight-line basis. At the beginning of
2014, the building was appraised and determined to have a fair value of $3,250,000.
There is no change in estimated useful life or residual value. In a switch to IFRS,
the company would use the revaluation model in IAS 16 to determine the carrying
value of property, plant, and equipment subsequent to acquisition.
Intangible Assets
As part of a business combination in 2011, the company acquired a brand with
a fair value of $40,000. The brand is classifi ed as an intangible asset with an indefi
nite life. At year-end 2014, the brand is determined to have a selling price of
$35,000 with zero cost to sell. Expected future cash fl ows from continued use of
the brand are $42,000, and the present value of the expected future cash fl ows is
$34,000.

Accounting

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Research and Development Costs
The company incurred research and development costs of $200,000 in 2014. Of
this amount, 40 percent related to development activities subsequent to the point
at which criteria had been met indicating that an intangible asset existed. As of the
end of the 2014, development of the new product had not been completed.
Sale-and-Leaseback
In January 2012, the company realized a gain on the sale-and-leaseback of an offi
ce building in the amount of $150,000. The lease is accounted for as an operating
lease, and the term of the lease is fi ve years.
Required
(1) Prepare a reconciliation schedule to convert 2014 income and December 31, 2014,
stockholders’ equity from a U.S. GAAP basis to IFRS. Ignore income taxes. Prepare
a note to explain each adjustment made in the reconciliation schedule.
(2) what is the amount of stockholders’ equity under IFRS?

Q4. What are the two models allowed for measuring property, plant, and equipment
at dates subsequent to original acquisition?

Q6. How is the revaluation surplus handled under the revaluation model?
Q14. To determine the amount at which inventory should be reported on the December
31, Year 1, balance sheet, Monroe Company compiles the following
information for its inventory of Product Z on hand at that date:

Accounting

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• Historical cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $20,000
• Replacement cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,000
• Estimated selling price. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,000
• Estimated costs to complete and sell . . . . . . . . . . . . . . . . . . . . . . ..2,000
• Normal profi t margin as a percentage of selling price . . . . . . . . . . . . . . . 20%
The entire inventory of Product Z that was on hand at December 31, Year 1,
was completed in Year 2 at a cost of $1,800 and sold at a price of $17,150.

Required:
a. Determine the impact that Product Z has on income in Year 1 and Year 2
under (1) IFRS and (2) U.S. GAAP.
b. Summarize the difference in income, total assets, and total stockholders’
equity using the two different sets of accounting rules over the two-year
period.

Chapter 5
Case 5-1
S. A. Harrington Company
S. A. Harrington Company is a U.S.-based company that prepares its consolidated
fi nancial statements in accordance with U.S. GAAP. The company reported
income in 2015 of $5,000,000 and stockholders’ equity at December 31, 2015, of
$40,000,000.
The CFO of S. A. Harrington has learned that the U.S. Securities and Exchange
Commission is considering requiring U.S. companies to use IFRS in preparing
consolidated fi nancial statements. The company wishes to determine the impact
that a switch to IFRS would have on its fi nancial statements and has engaged you
to prepare a reconciliation of income and stockholders’ equity from U.S. GAAP
to IFRS. You have identifi ed the following fi ve areas in which S. A. Harrington’s
accounting principles based on U.S. GAAP differ from IFRS.

Accounting

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1. Restructuring
2. Pension plan
3. Stock options
4. Revenue recognition
5. Bonds payable
The CFO provides the following information with respect to each of these
accounting differences.
Restructuring Provision
The company publicly announced a restructuring plan in 2015 that created a valid
expectation on the part of the employees to be terminated that the company will
carry out the restructuring. The company estimated that the restructuring would
cost $300,000. No legal obligation to restructure exists as of December 31, 2015.
Pension Plan
In 2013, the company amended its pension plan, creating a past service cost of
$60,000. The past service cost was attributable to already vested employees who
had an average remaining service life of 15 years. The company has no retired
employees.
Stock Options
Stock options were granted to key offi cers on January 1, 2015. The grant date fair
value per option was $10, and a total of 9,000 options were granted. The options
vest in equal installments over three years: one-third vest in 2014, one-third in
2015, and one-third in 2016. The company uses a straight-line method to recognize
compensation expense related to stock options.

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Revenue Recognition
The company entered into a contract in 2015 to provide engineering services to a
long-term customer over a 12-month period. The fi xed price is $250,000, and the
company estimates with a high degree of reliability that the project is 30 percent
complete at the end of 2015.
Bonds Payable
On January 1, 2014, the company issued $10,000,000 of 5 percent bonds at par
value that mature in fi ve years on December 31, 2018. Costs incurred in issuing the
bonds were $500,000. Interest is paid on the bonds annually.
Required
(1) Prepare a reconciliation schedule to reconcile 2015 net income and December 31,
2015, stockholders’ equity from a U.S. GAAP basis to IFRS. Ignore income taxes.
Prepare a note to explain each adjustment made in the reconciliation schedule.
(2) what is the amount of stockholders’ equity under IFRS?
Q10. Which income tax rates should be used in accounting for income taxes?
Q21. On January 2, Year 1, Argy Company’s board of directors granted 12,000 stock
options to a select group of senior employees. The requisite service period is
three years, with one-third of the options vesting at the end of each calendar
year (graded vesting). An option-pricing model was used to calculate a fair
value of $5 for each option on the grant date. The company assumes all 12,000
options will vest (i.e., there will be no forfeitures).
Required:
Determine the amount to be recognized as compensation expense in Year 1,
Year 2, and Year 3 under (a) IFRS and (b) U.S. GAAP. Prepare the necessary
journal entries.

Q22: IAS36-Q1: According to IAS 36, how is the impairment loss on a revalued asset recognized? Which paragraph of the IAS 36 provides the basis for your answer?
Q23: IAS36-Q2: According to IAS 36, what should an entity do when the recoverable amount of the individual asset cannot be estimated? Which paragraph of the IAS 36 provides the basis for your answer?
Q24: IAS36-Q3: According to IAS 36, the reversal of an impairment loss is not permitted for goodwill. Which paragraph of the IAS 36 provides the basis for this statement?

Accounting

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