Question

CH11Question5

Parnell Company acquired construction equipment on January 1, 2017, at a cost of $72,000. The equipment was expected to have a useful life of four years and a residual value of $11,000 and is being depreciated on a straight-line basis. On January 1, 2018, the equipment was appraised and determined to have a fair value of $67,100, a salvage value of $11,000, and a remaining useful life of three years. In measuring property, plant, and equipment subsequent to acquisition under IFRS, Parnell would opt to use the revaluation model in IAS 16.

Assume that a U.S.–based company is issuing securities to foreign investors who require financial statements prepared in accordance with IFRS. Thus, adjustments to convert from U.S. GAAP to IFRS must be made. Ignore income taxes.

Required:

A. Prepare journal entries for this equipment for the years ending December 31, 2017, and December 31, 2018, under (1) U.S. GAAP and (2) IFRS.

B. Prepare the entry(ies) that Parnell would make on the December 31, 2018 conversion worksheet to convert U.S. GAAP balances to IFRS.

Prepare the entry for this equipment for the years ending December 31, 2017, and December 31, 2018, under (1) U.S. GAAP and (2) IFRS. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) View transaction list Journal entry worksheet Record the entry for depreciation expense as per U.S. GAAP Note: Enter debits before credits Date General Journal Debit Credit 12/31/2017 Record entry Clear enty View génèral joumal

Answer 1

Under U.S GAAP

The company would report the equipment at its depreciated historical costs.

Straight line depreciation expenses under U.S.GAAP

Cost = $72,000

Useful life = 4 years

Residual Value = $11,000

Depreciation per year = (Cost –Residual Value)/Useful life

= (72,000 – 11,000) /4

= $15,250 year

Calculation of value of equipment as on 12/31/2017 and 12/31/2018

Description	As on 12/31/2017	As on 12/31/2018
Book Value at the beginning of the year	$72,000	$56,750
Less: Depreciation during the year	15,250	15,250
Book Value at the end of the year	$56,750	$41,500

Under IFRS as per IAS 16

As per IAS 16 the property, plant and equipment initially measured at cost and it also provide alternative method for measuring value of property, plant and equipment is that assets is carried at a revalued figure i.e. fair value at the date of revaluation reduced by subsequent depreciation.

Description	Amount
Book Value as on 1/1/17	$72,000
Less Depreciation (72,000-11,000)/4	15,250
Book Value as on 31/12/17	$56,750
Revalued figure as on 1/1/18	$67,100
Gain on Revaluation ( Fair value as on 1/1/18- Book Value as on 1/1/18) = (67,100 – 56,750)	$10,350
Remaining Useful life	3 years
Residual Value	11,000
Depreciation during the year 2018 = (67,100 – 11,000)/3	$18,700
Value of equipment as on 12/31/18 (67,100 -18,700)	$48,400

Net Effect of Conversion from U.S.GAAP to IFRS

Description	As per GAAP	As per IFRS	Profit/(Expenses)
2017
Value of equipment as on 12/31/17	56,750	56,750	Nil
Depreciation during the year	15,250	15,250	NIL
2018
Value of equipment as on 12/31/18	41,500	48,400	6,900
Depreciation during the year	15,250	18,700	(3,450)

Journal Entry

Required A

Date	General Journal	Debit	Credit
1	Record the entry for depreciation expense as per U.S.GAAP
12/31/2017	Depreciation Expenses	15,250
	Accumulated Depreciation – equipment		15,250
2	Record the entry for depreciation expense as per IFRS
12/31/2017	Depreciation Expenses	15,250
	Accumulated Depreciation – equipment		15,250
3	Record the entry for the revaluation of equipment as per U.S.GAAP
01/01/2018	No Journal Entry Required
4	Record the entry for the revaluation of equipment as per IFRS
01/01/2018	Equipment	10,350
	Gain on Revaluation of equipment at fair value		10,350
5	Record the entry for depreciation expense as per U.S.GAAP
12/31/2018	Depreciation Expenses	15,250
	Accumulated Depreciation – equipment		15,250
6	Record the entry for depreciation expense as per IFRS
12/31/2018	Depreciation Expenses	18,700
	Accumulated Depreciation – equipment		18,700

Required B

Date	Account Title	Debit	Credit
1	Record the entry for recording profit on revaluation of equipment due to conversion from U.S.GAAP to IFRS
	Equipment	6,900
	Gain on revaluation of equipment		6,900
2	Record the entry for additional depreciation expense on revaluation of equipment due to conversion from U.S.GAAP to IFRS
	Depreciation Expenses	3,450
	Accumulated Depreciation- Equipment		3,450