Chapter 11, Problem 16P

a.

To determine

Determine the amount of depreciation expense that Company B should recognize in determining net income in 2015, 2016, and 2017 and the amount at which equipment should be carried on the December 31, 2015, 2016, and 2017 balance sheets using (1) U.S. GAAP and (2) IFRS. In measuring property, plant, and equipment subsequent to acquisition, Company B uses the revaluation model in IAS 16.

Explanation of Solution

(1)

U.S. GAAP:

The entry to record equipment under U.S. GAAP:

The equipment is not recorded under U.S. GAAP as the revaluation model is not used under same.

Computation of value of equipment as on December 31, 2016:

$\begin{array}{c}\text{Equipment}\text{=}\text{Carrying}\text{amount}-\text{Depreciation}\\ =\$78,400-\frac{\$78,400-\$10,000}{6\text{years}}\\ =\$67,000\end{array}$

Computation of value of equipment as on December 31, 2017:

$\begin{array}{c}\text{Equipment}\text{=}\text{Carrying}\text{amount}-\text{Depreciation}\\ =\$67,000-\frac{\$78,400-\$10,000}{6\text{years}}\\ =\$55,600\end{array}$

(2)

IFRS:

The entry to record sale and leaseback under IFRS:

Date	Account Title and Explanation	Post ref.	Debit ($)	Credit ($)
1/1/2017	Accumulated Depreciation on equipment		11,400
	Equipment			11,400
	(being equipment reduced for accumulated depreciation)
1/1/2017	Equipment		7,500
	Revaluation surplus			7,500
	(being equipment revalued)
12/31/2017	Depreciation expense		12,900
	Accumulated Depreciation on equipment			12,900
	(being depreciation recorded after revaluation)

Table: (1)

b.

To determine

Determine the adjustments that Company B would make in 2015, 2016, and 2017 to reconcile net income and stockholders’ equity under U.S. GAAP to IFRS.

Explanation of Solution

The entry that Company B would make on December 31, 2018:

Date	Account Title and Explanation	Post ref.	Debit ($)	Credit ($)
12/31/2017	Depreciation expense		1,500
	Accumulated Depreciation on equipment		9,900
	Equipment			3,900
	Revaluation surplus			7,500
	(being revaluation surplus and depreciation recorded)

Table: (2)

Partial Conversion worksheet, December 31, 2016 (Revaluation of equipment)
Particulars	U.S. GAAP	Debit	Credit	IFRS
Depreciation expense	$11,400			$11,400
Net income	$11,400			$11,400
Retained earnings on 01/01/2016	$0			$0
Retained earnings on 12/31/2016	$11,400			$11,400
Revaluation surplus	$0			$0
AOCI on 01/01/2016	$0			$0
AOCI on 12/31/2016	$0			$0
Cash	($78,400)			($78,400)
Equipment	$78,400	$0		$78,400
Accumulated Depreciation on equipment	($11,400)	$0		($11,400)
Total assets	($11,400)			($11,400)
Total Liabilities	$0			$0
Retained earnings on 12/31/2016	$11,400			$11,400
AOCI, 31/12/2016	$0			$0
Total liabilities and Equity	$11,400	$0	$0	$11,400

Table: (3)

Partial Conversion worksheet, December 31, 2017 (Revaluation of equipment)
Particulars	U.S. GAAP	Debit	Credit	IFRS
Depreciation expense	$11,400	$1,500		$12,900
Net income	$11,400			$12,900
Retained earnings on 01/01/2017	$11,400			$11,400
Retained earnings on 12/31/2017	$22,800			$24,300
Revaluation surplus	$0		$7,500	($7,500)
AOCI on 01/01/2017	$0			$7,500
AOCI on 12/31/2017	$0			($7,500)
Cash	($78,400)			($78,400)
Equipment	$78,400	$0	$3,900	$74,500
Accumulated Depreciation on equipment	($22,800)	$9,900		($12,900)
Total assets	($22,800)			$9,000
Total Liabilities	$0			$0
Retained earnings on 12/31/2017	$22,800			$24,300
AOCI, 31/12/2017	$0			($7,500)
Total liabilities and Equity	$22,800	$11,400	$11,400	$16,800

Table: (4)