ACIB 872 Homework

Problems 2, 3, 5, 6, 7, 9, 10, 14, 19, 24 and 39

2. C
IAS 2 requires inventory to be reported on the balance sheet at the lower of cost and net
realizable value.
Cost = $50,000 > NRV = $45,000
3. A
5. D
6. B
7. D
9. C
10. A
14. Historical cost = $20,000
Replacement cost = $14,000
Estimated selling price = $17,000
Estimated costs to complete and sell = $2,000
Net realizable value = $17,000 - $2,000 = $15,000
Normal profit margin as a percentage of selling price = 20% * $15,000 = $3,000
Net realizable value less normal profit margin = $15,000 - $3,000 = $12,000
Inventory on hand = 0, in year 1; $17,150 @ $1,800 in year 2.
a.
1) IFRS
2) US GAAP
Regulation
Under IFRS, inventory needs to be
Under U.S. GAAP, inventory is
reported at the lower of cost and
carried at the lower of cost or
net realizable value.
replacement cost.
In year 1
NRV=$17,000-$2,000=$15,000
Replacement cost=$14,000
Cost=$20,000
Cost=$20,000
Inventory record @ $15,000
$14,000
Adjustments
Inventory must be written down by
Inventory must be written down by
$5,000.
$6,000.
In year 2
NRV=$17,150-$1,800=$15,350
New replacement cost = $12,000
Cost=$20,000
Carrying amount=$14,000
Carrying amount=$15,000
Inventory record @ $15,350
$14,000
Adjustments
Inventory must be reversed by $350. No adjustment needs to be made.
b. IFRS result in $1,000 larger income before tax, assets, and stockholders equity in year 1.
In year 2, Recovery of Inventory Loss increases income by $350. IFRS result in $650 ($1,000-$350)
smaller income before tax, but result in $

19.
a. IAS 36 requires impairment testing of property, plant, and equipment. An asset is impaired
when its carrying value exceeds its recoverable amount, which is the greater of net selling price
and value in use.
In year 4
Depreciation expense = $100,000/10years = $10,000 per year
Carrying amount = $100,000-$10,000*4 = $60,000
Net selling price = $50,000

ACIB 872 Homework

Value in use = $51,000.
Recoverable amount = $51,000
Carrying amount exceeds recoverable amount, so Quick Company must conduct an impairment
test on this piece of equipment at December 31, Year 4.
b. In year 4
Impairment loss = $60,000-$51,000 = $9,000
Dec. 31, year 4 Dr. Depreciation expense
Cr. Accumulated Depreciation
Dr. Impairment loss
Cr. Equipment

$10,000
$10,000
$9,000
$9,000

In year 5
Depreciation expense = $51,000/6years = $8,500 per year
Carrying amount = $51,000-$8,500 = $42,500
Dec. 31, year 5 Dr. Depreciation expense
Cr. Accumulated Depreciation

$8,500
$8,500

In year 6
Carrying amount = $100,000-$10,000*5 = $50,000
Net selling price = $42,000
Value in use = $44,000.
Recoverable amount = $44,000
Impairment loss = $50,000-$44,000 = $6,000
Dec, 31 year 6 Dr. Depreciation expense
Cr. Accumulated Depreciation
Dr. Equipment
Cr. Reversal of impairment loss
24.
a.
1) Under IFRS
Research expense
Deferred development costs
Amortization expense
2) Under US GAAP
R&D expense

$10,000
$10,000
$6,000
$6,000

Year 1 (million)

Year 2 (million)
$6
4

$0.8

10

b. IFRS result in $4 million larger income in Year 1 and $800,000 but smaller income in Years 2
compared to U.S. GAAP.
Total assets and total stockholders equity are larger under IFRS by the following amounts
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
$4,000,000
$3,200,000
$2,400,000
$1,600,000
$800,000
0

ACIB 872 Homework

39.
IFRS

A company takes out a loan to finance the construction

of a building that will be used by the company. The
interest on the loan is capitalized as part of the cost of
the building.
Inventory is reported on the balance sheet using the lastin, first-out (LIFO) cost flow assumption.
The gain on a saleleaseback transaction classified as an
operating lease is deferred and amortized over the lease
term.
A company writes a fixed asset down to its recoverable
amount and recognizes an impairment loss in Year 1. In a
subsequent year, the recoverable amount is determined
to exceed the assets carrying value, and the previously
recognized impairment loss is reversed.
A company pays less than the fair value of net assets
acquired in the acquisition of another company. The
acquirer recognizes the difference as a gain on purchase
of another company.
A company enters into an eight-year lease on equipment
that is expected to have a useful life of 10 years. The
lease is accounted for as an operating lease.
An intangible asset with an active market that was
purchased two years ago is carried on the balance sheet
at fair value.
In preparing interim financial statements, interim periods
are treated as discrete reporting periods rather than as
an integral part of the full year.
Development costs are capitalized when certain criteria
are met.
Interest paid on borrowings is classified as an operating
activity in the statement of cash flows.

U.S. GAAP

Both

Neither