Question

Parnell Company acquired construction equipment on January 1, 2017, at a cost of $71,700. The equipment was expected to have a useful life of five years and a residual value of $10,000 and is being depreciated on a straight-line basis. On January 1, 2018, the equipment was appraised and determined to have a fair value of $67,700, a salvage value of $10,000, and a remaining useful life of four years. In measuring property, plant, and equipment subsequent to acquisition under IFRS, Parnell would opt to use the revaluation model in IAS 16. Assume that a U.S.–based company is issuing securities to foreign investors who require financial statements prepared in accordance with IFRS. Thus, adjustments to convert from U.S. GAAP to IFRS must be made. Ignore income taxes. Required: Prepare journal entries for this equipment for the years ending December 31, 2017, and December 31, 2018, under (1) U.S. GAAP and (2) IFRS. Prepare the entry(ies) that Parnell would make on the December 31, 2018 conversion worksheet to convert U.S. GAAP balances to IFRS.

Answer 1

Ans- Straight line depreciation expenses under U.S.GAAP:-

Cost=$71,700

Useful Life= 5 years

Residual Value= $10,000

Depreciation per year= Cost- Residual Value/ Useful Life

Depreciation per year= $71,700-$10,000/ 5 Years

Depreciation per year= $12,340

Calculation of value of equipment as on 12/31/2017 and 12/31/2018:-

Description	As on 12/31/2017	As on 12/31/2018
Book Value at the beginning of the year	$ 71,700	$ 59,360
Less: Depreciation during the year	$ 12,340	$ 12,340
Book Value at the end of the year	$ 59,360	$ 47,020

Under IFRS as per IAS 16:-

Book Value as on 1/1/17	$71,700
Less: Depreciation ($71,700-$10,000)/ 5	($12,340)
Book Value as on 31/12/17	$59,360
Revalued figure as on 1/1/18	$67,700
Gain on Revaluation (Fair Value as on 1/1/18- Book Value as on 1/1/18)= ($67,700-$59,360)	$8,340
Remaining Useful life	4 years
Residual Value	$10,000
Depreciation during the year 2018= ($67,700-$10,000)/ 4	$14,425
Value of equipment as on 12/31/18 ($67,700-$14,425)	$53,275

Net Effect of Conversion from U.S.GAAP to IFRS:-

Description	As per GAAP	As per IFRS	Profit/ (Expenses)
2017
Value of equipment as on 12/31/17	$59,360	$59,360	Nil
Depreciation during the year	$12,340	$12,340	Nil
2018
Value of equipment as on 12/31/18	$47,020	$53,275	$6,255
Depreciation during the year	$12,340	$14,425	$($2,085)

a- Preparing Journal Entries for this Equipment for the years ending December 31, 2017 and December 31, 2018 under (1) U.S., GAAP and (2) IFRS:-

Date	General Journal	Debit	Credit
12/31/2017	Depreciation Expense	$12,340
	Accumulated Depreciation - Equipment		$12,340
	(To record the entry for depreciation expense as per U.S.GAAP)
12/31/2017	Depreciation Expense	$12,340
	Accumulated Depreciation- Equipment		$12,340
	(To record the entry for depreciation expense as per IFRS)
1/1/2018	No Journal Entry Required
	(To record the entry for the revaluation of equipment as per U.S.GAAP)
1/1/2018	Equipment	$8,340
	Gain on Revaluation of Equipment at fair value)		$8,340
	( To record the entry for revaluation of equipment as per IFRS)
12/31/2018	Depreciation Expense	$12,340
	Accumulated Depreciation- Equipment		$12,340
	(To record the entry for depreciation expense as per U.S.GAAP)
12/31/2018	Depreciation Expense	$14,425
	Accumulated Depreciation- Equipment		$14,425
	(Record the entry for depreciation expense as per IFRS)

2- Preparing the Journal Entries that Parnell would make on the December 31, 2018 conversion worksheet to convert U.S.GAAP balances to IFRS:-

Event	General Journal	Debit	Credit
1	Equipment	$6,255
	Gain on revaluation of equipment		$6,255
	(To record the entry for recording profit on revaluation of equipment due to conversion from U.S.GAAP to IFRS)
2	Depreciation Expense	$2,085
	Accumulated Depreciation- Equipment		$2,085
	(To record the entry for additional depreciation expense on revaluation of equipment due to conversion from U.S.GAAP to IFRS)