Exam case financial accounting Essay Example for Free

Exam case financial accounting EssaySolutions to Exercises and Problems Tutorial 1 IFMCase 2-2Case 2-2 SKD Limited1.GoodwillThere is no goodwill amortization expense in kingdom A, so the goodwill amortization expense recognized by SKD must be added back to determine income under region A GAAP. SKD amortizes goodwill over a longer period (20 social classs) than is allowed in Country B (5 divisions), 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 limiting affects the retained earnings in stockholders equity. The annex 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 large as the income adjustment implies that the goodwill was purchased three year ago.2.Capitalized sakia.The adjustment labeled Capitalized engage 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 wear and tear of the interest that was capitalized as take up 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 Assetsa.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 deprecation would be included in the stockholders equity adjustment. 27 . Holzer Comp each Property, Plant, and Equipment (capitalization of borrowing costs and measurement of asset subsequent to acquisition using devil alternative models)IAS 16 Cost ModelCarry asset on the balance sheet at cost less accumulated depreciation and either accumulated impairment losses.Capitalize borrowing costs borrowing costs attributable to the construction of qualifying assets.Annual interest ($900,000 x 10%)$90,000 concern 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 constructionConstruction 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$26,250Balance SheetBuilding (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$945,000IAS 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$25,526Loss 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 fixed 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 change magnitude 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.