Question

9. Jefferson Company acquired equipment on January 2, Year 1, at a cost of $10 million. The equipment has a fi ve-year life, no residual value, and is depreciated on a straight-line basis. On January 2, Year 3, Jefferson Company determines the fair value of the asset (net of any accumulated depreciation) to be $12 million Required: a Determine the impact the equipment has on Jefferson Company's income in Years 1-5 using (1) IFRS, assuming that the revaluation model is used for measurement subsequent to initial recognition, 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 period of Years 1-5.

Answer 1

Answer:

Jefferson Company - Property,Plant and Equipment (measurement subsequent to acquisition)

	Cost, 1/2/Y1	$10,000,000
	Useful life	5 years
	Annual depreciation	$2,000,000
	Book value , 12/31/Y2	$6,000,000

IFRS Allowed Alternative
Fair value, 1/2/Y3	$12,000,000
Remaining useful life	3 years
Annual depreciation	$4,000,000

a.

	Depreciation expense	IFRS	U.S. GAAP
	Years 1 and 2	$2,000,000	$2,000,000
	Years 3,4 and 5	$4,000,000	$2,000,000

Income before tax is the same under IFRS and U.S. GAAP in Years 1 and 2.Income before tax is $2,000,000 smaller under IFRS in Years 3,4 and 5.

b.

	End of year
	Equipment (book value)	1	2	3	4	5
	IFRS
	Begining	$10 mn	$8 mn	$6 mn	$8 mn	$4mn
	Revaluation			6 mn
	Depreciation expense	(2 mn)	(2 mn)	(4 mn)	(4 mn)	(4 mn)
	Ending	$8 mn	$6 mn	$8mn	$4 mn	$0
	U.S. GAAP
	Beginning	$10 mn	$8 mn	$6 mn	$4 mn	$2 mn
	Depreciation expense	(2 mn)	(2 mn)	(2 mn)	(2 mn)	(2 mn)
	Ending	$8 mn	$6 mn	$4 mn	$2 mn	$0
	End of year
	Stockholder's equity	1	2	3	4	5
	IFRS
	Beginning	($0)	($2 mn)	($4 mn)	($2 mn)	($6 mn)
	Revaluation			$6 mn
	Depreciation expense	($2 mn)	($2 mn)	($4 mn)	($4 mn)	($4 mn)
	Ending	($2 mn)	($4 mn)	($2 mn)	($6 mn)	($10 mn)
	U.S. GAAP
	Beginning	($0)	($2 mn)	($4 mn)	($6 mn)	($8 mn)
	Depreciation expense	($2 mn)	($2 mn)	($2 mn)	($2 mn)	($2 mn)
	Ending	($2 mn)	($4 mn)	($6 mn)	($8 mn)	($10 mn)