Chapter 10, Problem 1C

1.

To determine

Record journal entries of adjustments and then post these entries to column 2 and 3 in the provided worksheets.

Explanation of Solution

Reconciling Financial Statements:

Reconciling local terminology financial statements to the U.S. GAAP terminology is required because the foreign companies listed on U.S. stock exchanges have to provide financial statements in US terminology.

To record capitalized interest:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Property, plant and equipment		$54$
	Depreciation and amortization		$5$
	Interest expense			$13$
	Retained earnings			$46$
	(to record capitalized interest)

Table (1)

• Since property, plant and equipment is an asset and assets are increased. Hence, property, plant and equipment are debited.
• Since depreciation and amortization is an expense and expenses are increased. Hence, depreciation and amortization is debited.
• Since interest expense is a gain and gains are increased. Hence, interest expense is credited.
• Since retained earnings are a liability and liabilities are increased. Hence, retained earnings are credited.

To record restructuring charges:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
b.	Property, plant and equipment		$107$
	Other long-term liabilities		$98$
	Restructuring charges			$205$
	(to record restructuring charges)

Table (2)

• Since property, plant and equipment is an asset and assets are increased. Hence, property, plant and equipment are debited.
• Since other long-term liabilities are a liability and liabilities are decreased. Hence, other long-term liabilities are debited.
• Since restructuring charges is a gain and gains are increased. Hence, restructuring charges is credited.

To record depreciation and amortization:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Depreciation and amortization		$5$
	Property, plant and equipment			$5$
	(to record depreciation and amortization)

Table (3)

• Since depreciation and amortization is an expense and expenses are increased. Hence, depreciation and amortization is debited.
• Since property, plant and equipment is an asset and assets are decreased. Hence, property, plant and equipment are credited.

To record other non-current assets:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Other non-current assets		$475$
	Depreciation and amortization		$188$
	Goods and services purchased			$370$
	Retained earnings			$293$
	(to record non-current assets)

Table (4)

• Since other non-current assets are an asset and assets are increased. Hence, other non-current assets are debited.
• Since depreciation and amortization is an expense and expenses are increased. Hence, depreciation and amortization is debited.
• Since goods and services purchased are an asset and assets are decreased. Hence, goods and services purchased is credited.
• Since retained earnings is a liability and liabilities are increased. Hence, retained earnings is credited.

To record equity in net loss of affiliate:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Investments		$50$
	Equity in net loss of affiliate			$50$
	(to record equity in net loss of affiliate)

Table (5)

• Since investment is an asset and assets are increased. Hence, investment is debited.
• Since equity in net loss of affiliate is a gain and gains are increased. Hence, equity in net loss of affiliate is credited.

Worksheet for restating financial statements from IFRS to U.S, GAAP:

Items	1	2		3	4
	IFRS (in $m)	Reconciling adjustments		Note	U.S. GAAP (in $m)
		Debit	Credit
Net revenues	$9,842$				$9,842$
Add: capitalized cost and change in inventories	$277$				$277$
Total	$10,119$				$10,119$
Less: Goods and services purchased	$1,666$		$370$	d	$1,296$
Personnel expenses	$2,584$				$2,584$
Other operating expenses	$2,090$				$2,090$
Depreciation and amortization	$1,739$	$5$		a	$1,973$
		$5$		c
		$188$		d
Restructuring charges	$1,726$		$205$	b	$1,521$
Total operating expenses	$9,805$				$9,428$
Operating income	$314$				$691$
Interest expense	$-428$		13	a	-415
Financial income	$25$				$25$
Income (loss) before taxes and equity in net loss of affiliated companies	$-89$				$301$
Income tax expense	$1$				$1$
Income (loss) before equity in net loss of affiliated companies	$-90$				$300$
Equity in net loss of affiliated companies	$-325$		$50$	e	$-275$
Net income (loss)	$-415$				$25$
Profit distribution declared	$-1,282$				$-1,282$
Conversion of loan payable to equity	$3,200$				$3,200$
Retained earnings	$1,352$				$2,131$

Table (6)

Consolidated balance sheet:

Items	Local GAAP (in $m)	Reconciling adjustments		Note	U.S. GAAP (in $m)
		Debit	Credit
Assets
Current assets:
Cash	$256$				$256$
Securities available for sale	$51$				$51$
Accounts receivable	$2,052$				$2,052$
Inventories	$169$				$169$
Other current assets	$34$				$34$
Total current assets(A)	$2,562$				$2,562$
Non-current  assets:
Property, plant and equipment	$11,453$	$54$		a	$11,609$
		$107$		b
			$5$	c
Investments	$1,238$	$50$		e	$1,288$
Other non-current  assets	$220$	$475$		d	$695$
Total non-current  assets (B)	$12,911$				$13,592$
Total assets (A+B)	$15,473$				$16,154$
Liabilities and shareholders’ equity
Current liabilities:
Short-term debt	$1,178$				$1,178$
Accrued pension cost	$789$				$789$
Trade accounts payable	$889$				$889$
Other current liabilities	$2,213$				$2,213$
Total current liabilities (C)	$5,069$				$5,069$
Long term liabilities:
Long-term debt	$6,200$				$6,200$
Finance lease obligation	$439$				$439$
Other long term liabilities	$789$				$789$
Accrued pension cost	$1,488$				$1,488$
Accrued liabilities	$709$				$709$
Total long-term liabilities (D)	$9,174$				$9,076$
Total liabilities (E) (C+D)	$14,243$				$14,145$
Shareholders’ equity:
Retained earnings	$1,352$			R/E	$2,131$
Unrealized market value adjustment on securities available for sale	$39$				$39$
Cumulative translation adjustment	$-161$				$-161$
Total shareholders’ equity (F)	$1,230$				$2,009$
Total liabilities and shareholders’ equity (E+F)	$15,473$	$794$	$794$		$16,154$

Table (7)

2.

To determine

Calculate current ratio, total asset turnover ratio, debt/equity ratio, times interest earned, net profit margin, operating income as percent of total shareholders’ equity on a Local GAAP and a U.S. GAAP basis for Year 2.

Explanation of Solution

On Local GAAP basis:

Calculation of net income/net revenues:

The formula to calculate net profit margin is,

$\mathrm{Net}profitmargin=\frac{Netincome}{Net\mathrm{revenues}}$

Substitute $-\$415$ for net income and $\$9,842$ for net revenues in the above formula.

$\begin{array}{c}\mathrm{Net}profitmargin=\frac{-\$415}{\$9,842}\\ =-0.04\end{array}$

Thus, net profit margin is $-0.04$.

Calculation of operating profit margin:

The formula to calculate operating profit margin is,

$\mathrm{Operating}profitmargin=\frac{\mathrm{Operating}income}{\mathrm{Net}revenues}$

Substitute $\$314$ for operating income and $\$9,842$ for net revenues in the above formula.

$\begin{array}{c}\mathrm{Operating}profitmargin=\frac{\$314}{\$9,842}\\ =0.03\end{array}$

Thus, operating profit margin is $0.03$.

Calculation of return on total assets:

The formula to calculate return on total assets,

$\mathrm{Return}ontotalassets=\frac{\mathrm{Operating}income}{\mathrm{Total}assets}$

Substitute $\$314$ for operating income and $\$21,090$ for total assets in the above formula.

$\begin{array}{c}\mathrm{Return}ontotalassets=\frac{\$314}{\$15,473}\\ =0.02\end{array}$

Thus, total asset turnover is $0.02$.

Calculation of return on equity:

The formula to calculate return on equity is,

$\mathrm{Return}onequity=\frac{Netincome}{\mathrm{Total}\mathrm{shareholders}\text{'}equity}$

Substitute $-\$415$ for net income and $\$1,230$ for total shareholders’ equity in the above formula.

$\begin{array}{c}\mathrm{Return}onequity=\frac{-\$415}{\$1,230}\\ =-0.34\end{array}$

Thus, return on equity is $-0.34$.

Calculation of income as percent of total shareholders’ equity:

The formula to calculate IPTSE is,

$\mathrm{IPTSE}=\frac{\mathrm{Operating}income}{\mathrm{Total}\mathrm{shareholders}’equity}$

Substitute $\$314$ for operating income and $\$1,230$ for total shareholders’ equity in the above formula.

$\begin{array}{c}\mathrm{IPTSE}=\frac{\$314}{\$1,230}\\ =0.26\end{array}$

Thus, IPTSE is $0.26$.

Calculation of current ratio:

The formula to calculate current ratio is,

$\mathrm{Current}ratio=\frac{\mathrm{Current}assets}{\mathrm{Current}liabilities}$

Substitute $\$2,562$ for current assets and $\$5,069$ for current liabilities in the above formula.

$\begin{array}{c}\mathrm{Current}ratio=\frac{\$2,562}{\$5,069}\\ =0.51\end{array}$

Thus, current ratio is $0.51$.

Calculation of debt-to-equity ratio:

The formula to calculate debt-to-equity ratio is,

$\mathrm{Debt}-to-equityratio=\frac{\mathrm{Total}liabilities}{\mathrm{Total}\mathrm{shareholders}’equity}$

Substitute $\$14,243$ for total liabilities and $\$1,230$ for total shareholders’ equity in the above formula.

$\begin{array}{c}\mathrm{Debt}-to-equityratio=\frac{\$14,243}{\$1,230}\\ =11.58\end{array}$

Thus, debt-to-equity ratio is $11.58$.

On U.S. GAAP basis:

Calculation of net income/net revenues:

The formula to calculate net profit margin is,

$\mathrm{Net}profitmargin=\frac{Netincome}{Net\mathrm{revenues}}$

Substitute $\$25$ for net income and $\$9,842$ for net revenues in the above formula.

$\begin{array}{c}\mathrm{Net}profitmargin=\frac{\$25}{\$9,842}\\ =0.003\end{array}$

Thus, net profit margin is $0.003$.

Calculation of operating profit margin:

The formula to calculate operating profit margin is,

$\mathrm{Operating}profitmargin=\frac{\mathrm{Operating}income}{\mathrm{Net}revenues}$

Substitute $\$691$ for operating income and $\$9,842$ for net revenues in the above formula.

$\begin{array}{c}\mathrm{Operating}profitmargin=\frac{\$691}{\$9,842}\\ =0.07\end{array}$

Thus, operating profit margin is $0.07$.

Calculation of return on total assets:

The formula to calculate return on total assets,

$\mathrm{Return}ontotalassets=\frac{\mathrm{Operating}income}{\mathrm{Total}assets}$

Substitute $\$691$ for operating income and $\$16,154$ for total assets in the above formula.

$\begin{array}{c}\mathrm{Return}ontotalassets=\frac{\$691}{\$16,154}\\ =0.04\end{array}$

Thus, total asset turnover is $0.04$.

Calculation of return on equity:

The formula to calculate return on equity is,

$\mathrm{Return}onequity=\frac{Netincome}{\mathrm{Total}\mathrm{shareholders}\text{'}equity}$

Substitute $\$25$ for net income and $\$2,009$ for total shareholders’ equity in the above formula.

$\begin{array}{c}\mathrm{Return}onequity=\frac{\$25}{\$2,009}\\ =0.01\end{array}$

Thus, return on equity is $0.01$.

Calculation of income as percent of total shareholders’ equity:

The formula to calculate IPTSE is,

$\mathrm{IPTSE}=\frac{\mathrm{Operating}income}{\mathrm{Total}\mathrm{shareholders}’equity}$

Substitute $\$691$ for operating income and $\$2,009$ for total shareholders’ equity in the above formula.

$\begin{array}{c}\mathrm{IPTSE}=\frac{\$691}{\$2,009}\\ =0.34\end{array}$

Thus, IPTSE is $0.34$.

Calculation of current ratio:

The formula to calculate current ratio is,

$\mathrm{Current}ratio=\frac{\mathrm{Current}assets}{\mathrm{Current}liabilities}$

Substitute $\$2,562$ for current assets and $\$5,069$ for current liabilities in the above formula.

$\begin{array}{c}\mathrm{Current}ratio=\frac{\$2,562}{\$5,069}\\ =0.51\end{array}$

Thus, current ratio is $0.51$.

Calculation of debt-to-equity ratio:

The formula to calculate debt-to-equity ratio is,

$\mathrm{Debt}-to-equityratio=\frac{\mathrm{Total}liabilities}{\mathrm{Total}\mathrm{shareholders}’equity}$

Substitute $\$14,145$ for total liabilities and $\$2,009$ for total shareholders’ equity in the above formula.

$\begin{array}{c}\mathrm{Debt}-to-equityratio=\frac{\$14,145}{\$2,009}\\ =7.04\end{array}$

Thus, debt-to-equity ratio is $7.04$.

Calculation of difference between each IFRS and U.S. GAAP ratio using IFRS as the base:

The formula to calculate difference between net profit margins,

$\mathrm{Percentage}difference=\frac{\left(\begin{array}{l}\mathrm{US}GAAP\mathrm{net}profit\mathrm{margin}\\ -\mathrm{IFRS}netprofit\mathrm{margin}\end{array}\right)}{\mathrm{IFRS}netprofit\mathrm{margin}}\times 100$

Substitute $-0.04$ for US GAAP net profit margin and $0.003$ for IFRS net profit margin in the above formula.

$\begin{array}{c}\mathrm{Percentage}difference=\frac{-0.040-0.003}{0.003}\times 100\\ =-1433.33\%\end{array}$

Difference between operating profit margins:

The formula to calculate difference between operating profit margins,

$\mathrm{Percentage}difference=(\frac{\left(\begin{array}{l}\mathrm{US}GAAP\mathrm{operating}profit\mathrm{margin}\\ -\mathrm{IFRS}\mathrm{operating}profit\mathrm{margin}\end{array}\right)}{\mathrm{IFRS}\mathrm{operating}profit\mathrm{margin}}\times 100)$

Substitute $0.07$ for US GAAP operating profit margin and $0.03$ for IFRS operating profit margin in the above formula.

$\begin{array}{c}\mathrm{Percentage}difference=\frac{0.07-0.03}{0.03}\times 100\\ =13.33\%\end{array}$

The formula to calculate difference between return on total assets,

$\mathrm{Percentage}difference=(\frac{\left(\begin{array}{l}\mathrm{US}GAAP\mathrm{return}ontotalassets\\ -\mathrm{IFRS}\mathrm{return}ontotalassets\end{array}\right)}{\mathrm{IFRS}\mathrm{return}ontotalassets}\times 100)$

Substitute $0.04$ for US GAAP return on total assets and $0.02$ for IFRS return on total assets in the above formula.

$\begin{array}{c}\mathrm{Percentage}difference=\frac{0.04-0.02}{0.02}\times 100\\ =100\%\end{array}$

Difference between return on equity:

The formula to calculate difference between return on equity,

$\mathrm{Percentage}difference=\frac{\left(\begin{array}{l}\mathrm{US}GAAP\mathrm{return}onequity\\ -\mathrm{IFRS}\mathrm{return}onequity\end{array}\right)}{\mathrm{IFRS}\mathrm{return}onequity}\times 100$

Substitute $0.01$ for US GAAP return on equity and $-0.34$ for IFRS return on equity in the above formula.

$\begin{array}{c}\mathrm{Percentage}difference=\frac{0.01-\left(-0.34\right)}{-0.34}\times 100\\ =-102.94\%\end{array}$

Difference between incomes as percent of total shareholders’ equity (IPTSE):

The formula to calculate difference between IPTSE,

$\mathrm{Percentage}difference=\frac{\mathrm{US}GAAP\mathrm{IPTSE}-\mathrm{IFRS}\mathrm{IPTSE}}{\mathrm{IFRS}\mathrm{IPTSE}}\times 100$

Substitute $0.34$ for US GAAP IPTSE and $0.26$ for IFRS IPTSE in the above formula.

$\begin{array}{c}\mathrm{Percentage}difference=\frac{0.34-0.26}{0.26}\times 100\\ =30.77\%\end{array}$

Difference between debt-to-equity ratios:

The formula to calculate difference between debt-to-equity ratios,

$\mathrm{Percentage}difference=(\frac{\left(\begin{array}{l}\mathrm{US}GAAP\mathrm{debt}-to-equityratio\\ -\mathrm{IFRS}\mathrm{debt}-to-equityratio\end{array}\right)}{\mathrm{IFRS}\mathrm{debt}-to-equityratio}\times 100)$

Substitute $7.04$ for US GAAP debt-to-equity ratio and $11.58$ for IFRS debt-to-equity ratio in the above formula.

 $\begin{array}{c}\mathrm{Percentage}difference=\frac{7.04-11.58}{11.58}\times 100\\ =-39.20\%\end{array}$

Thus, current ratio (current assets/current liabilities) is least affected $\left(0\%\right)$ by the accounting standards used.