Ciclista Inc., a bicycle manufacturer, is preparing its financial statements for December 31, 2020. The company has identified the following legal situations that can be classified as contingencies.
1. The company has discovered that a type of bicycle that they began to manufacture and sell in 2020 has some defects in the handlebars. The company has sent a statement to newspapers and magazines offering to replace the handlebars. The company estimates a cost of $ 400,000 for these repairs (This is recorded as a separate entry from Expense). No legal charges have been filed for damages caused by the defect. The company believes that there is a reasonable chance (MORE LIKELY THAN NOT IN IFRS, MEANS POSSIBLE IN US GAAP) that claims for damages will total $ 1,500,000.
2. The company maintains an incinerator in the back of a warehouse that is used to burn cardboard boxes received in inventory shipments. In September 2020, the state environmental protection agency filed a lawsuit against the company for contamination. The company hopes to stop using the incinerator and start recycling. However, his lawyers consider it probable (MORE LIKE THAN NOT IN IFRS, and means PROBABLE IN US GAAP) that a fine between $ 40,000 and $ 60,000 will be awarded against the company. Lawyers cannot predict the exact amount.
Required:
A. Indicate how the accounting treatment would be under US GAAP and IFRS in both situations. Post journal entries when necessary.
Generally accepted accounting principles, or GAAP, are rules that encompass the details, complexities, and legalities of business and corporate accounting. The Financial Accounting Standards Board (FASB) uses GAAP as the foundation for its comprehensive set of approved accounting methods and practices.
accrual accounting method
Only the accrual accounting method is allowed by generally accepted accounting principles (GAAP). Accrual accounting recognizes costs and expenses when they occur rather than when actual cash is exchanged.
As the name implies, International Financial Reporting Standards (IFRS) is an international standard developed by the International Accounting Standards Board (IASB). U.S. Generally Accepted Accounting Principles (GAAP) is only used in the United States.
The four basic constraints associated with GAAP include objectivity, materiality, consistency, and prudence.
These five basic principles form the foundation of modern accounting practices.
5 Important Principles of Modern Accounting
The Revenue Principle. ...
The Expense Principle. ...
The Matching Principle. ...
The Cost Principle. ...
The Objectivity Principle.
The primary difference between the two systems is that GAAP is rules-based, and IFRS is principles-based. This disconnect manifests itself in specific details and interpretations. Basically, IFRS guidelines provide much less overall detail than GAAP.
GAAP helps govern the world of accounting according to general rules and guidelines. It attempts to standardize and regulate the definitions, assumptions, and methods used in accounting across all industries. GAAP covers such topics as revenue recognition, balance sheet classification, and materiality.
The IFRS does not hold special distinctions for operational nature items that occur irregularly or infrequently; rather, all results are disclosed as revenues, finance costs, post-tax gains or losses, or results from associates and joint ventures.
International Financial Reporting Standards (IFRS) set common rules so that financial statements can be consistent, transparent, and comparable around the world. ... They specify how companies must maintain and report their accounts, defining types of transactions, and other events with the financial impact
IFRS defines revenue as a gross inflow of economic benefit increasing equity accounts, other than owners' direct equity contributions. This leads to differences in how sales, service, and deferred revenue are recognized and reported.
Approximately 120 nations and reporting jurisdictions permit or require IFRS for domestic listed companies. However, approximately 90 countries have fully conformed with IFRS as promulgated by the IASB and include a statement acknowledging such conformity in audit reports.
Indicate how the accounting treatment would be under US GAAP and IFRS in both situations. Post journal entries when necessary.
Provide enteries for the following preparing Fallon Company financial statements December 31, 2016 A customer is suing the company for $800,00 in damages bc her child was injured in November 2016 while riding an escalator that stopped suddenly in one of its stores. Legal counsel feels that the child id partially at fault, but it is probable that the lawsuit will be settled for between $50,000 and $100,000, with $80,000 being the most likely amount Fallon has discovered that a...
Walbash Company presents the following December 31, 2016, balance sheet: Walbash Company Sheet of Balances for Year Ended December 31, 2016 Current Assets $ 44,300 Long-term investments13,600 Property, plant, and equipment123,500 Intangible assets7,700 Other assets13,600 ______ Total assets $202,700 Current liabilities $ 66,600 Long-term liabilities 24,100 Contributed capital 17,000 Unrealized capital 22,500 Retained earnings 72,500 ______ Total equities $202,700 The following information is also available: 1. Current assets include cash, $3,800; accounts receivable, $18,500; notes receivable (maturity date July 1,...