Chapter 11, Problem 18P

a.

To determine

Determine the appropriate accounting for this sale and leaseback for the years ending December 31, 2017, and December 31, 2018, under (1) IFRS and (2) U.S. GAAP.

Explanation of Solution

(1)

IFRS:

The entry to be recorded under IFRS:

December 31, 2017:

Date	Accounting heads and explanation	Post Ref.	Debit (reais)	Credit (reais)
1 Jan, 2017	Cash		200,000
	Building (net)			150,000
	Gain on sale of building			50,000
	(To recognize the sale of a building and related gain)

Table: (1)

December 31, 2018:

The entire gain on sale of building was recognized in 2017 therefore, there will be no further entries in 2018 under IFRS.

(2)

U.S. GAAP:

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

December 31, 2017:

Date	Accounting heads and explanation	Post Ref.	Debit (reais)	Credit (reais)
1 Jan, 2017	Cash		200,000
	Building (net)			150,000
	Deferred Gain on sale of   building			50,000
	(To recognize the sale of a building with deferral of the related gain)
Date	Accounting heads and explanation	Post Ref.	Debit (reais)	Credit (reais)
31 Dec, 2017	Deferred gain on sale of building		5,000
	Gain on sale of building			5,000
	(To amortize the deferred gain on sale of building over the term of lease (50,000/10))

Table: (2)

December 31, 2018:

Under US GAAP, an additional 5,000 reais of gain on sale of building will be recognized with an offsetting reduction in the deferred gain. The journal entry for the same will be:

Date	Accounting heads and explanation	Post Ref.	Debit (reais)	Credit (reais)
31 Dec, 2017	Deferred gain on sale of building		5,000
	Gain on sale of building			5,000
	(To amortize the deferred gain on sale of building over the term of lease (50,000/10))

Table: (3)

b.

To determine

Prepare the entry that the U.S. parent would make on the December 31, 2017, and December 31, 2018, conversion worksheets to convert IFRS balances to U.S. GAAP.

Explanation of Solution

Conversion entries on December 31, 2017:

Date	Accounting heads and explanation	Post Ref.	Debit (reais)	Credit (reais)
31 Dec, 2017	Gain on sale of building		45,000
	Deferred  gain on sale of building			45,000
	(To reverse the gain on sale of building recognized under IFRS0

Table: (4)

Below is the partial conversion worksheet below reflects that the conversion entry will result in the correct amount being reported under US GAAP as of 31 December 2017 (Table 6):

Partial conversion worksheet, 31/12/17 (Gain on sale and leaseback)
		Conversion entries
Account	IFRS	Debit	Credit	U.S. GAAP
Gain on sale of building	50,000	45,000		5,000
Net income (Positive)	50,000			5,000
Retained earnings (1/1/17)	0			0
Retained earnings (31/12/17)	50,000			5,000
Cash	200,000			200,000
Buildings	150,000			150,000
Total assets	50,000			50,000
Deferred gain on sale of building (liability)	0		45,000	45,000
Total liabilities	0			45,000
Retained earnings, 31/12/17 (above)	50,000			5,000
Total liabilities and equity	50,000			50,000
		45,000	45,000

Table: (4)

Conversion entries on December 31, 2018:

Date	Accounting heads and explanation	Post Ref.	Debit (reais)	Credit (reais)
31 Dec, 2017	Retained earnings		45,000
	Gain on sale of building			5,000
	Deferred  gain on sale of building			40,000
	(To reverse the gain on sale of building recognized under IFRS0

Table: (5)

Below is the partial conversion worksheet below reflects that the conversion entry will result in the correct amount being reported under US GAAP as of 31 December 2018 (Table 8):

Partial conversion worksheet, 31/12/18 (Gain on sale and leaseback)
		Conversion entries
Account	IFRS	Debit	Credit	U.S . GAAP
Gain on sale of building	0		5,000	5,000
Net income (Positive)	0			5,000
Retained earnings (1/1/18)	50,000	45,000		5,000
Retained earnings (31/12/18)	50,000			10,000
Cash	200,000			200,000
Buildings	150,000			150,000
Total assets	50,000			50,000
Deferred gain on sale of building (liability)	0		40,000	40,000
Total liabilities	0			40,000
Retained earnings, 31/12/18	50,000			10,000
Total liabilities and equity	50,000			50,000
		45,000	45,000

Table: (6)