Question

Rawl Corporation sold a building to a bank at the beginning of 2017 at a gain of $80,100 and immediately leased the building back for a period of four years. The lease is accounted for as an operating lease. The book value of building (net) is $510,000. 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 sale and leaseback for the years ending December 31, 2017, and December 31, 2018, under (1) U.S. GAAP and (2) IFRS. Prepare the entry(ies) that Rawl would make on the December 31, 2017, and December 31, 2018, conversion worksheets to convert U.S. GAAP balances to IFRS.

A)

1. Record the entry for the sale of the building as per U.S. GAAP.

2. Record the entry for gain recognition as per U.S. GAAP.

3. Record the entry for the sale of the building as per IFRS.

4. Record the entry for gain recognition as per IFRS.

B)

1. Record the entry for deferring gain on sale of building which was previously recognized in Profit and loss account due to conversion from U.S. GAAP to IFRS

2. Record the entry for deferring gain on sale of building which was previously recognized in Profit and loss account due to conversion from U.S. GAAP to IFRS.

3. Record the entry for reversing part of deferred gain already recognized in Profit and Loss account as per U.S. GAAP.

Answer 1

Answers:

A)

No.	Date	General Journal	Debit	Credit
1	01-01-17	Cash	590,100
		Building		510,000
		Deferred gain on sale of building		80,100
	To record the entry for the sale of the building as per U.S. GAAP.
2	12/31/2017	Deferred gain on sale of building	20,025
		Gain on sale of building		20,025
	To record the entry for gain recognition as per U.S. GAAP.
3	01-01-17	Cash	590,100
		Building		510,000
		Gain on sale of building		80,100
	To record the entry for the sale of the building as per IFRS.
4	12/31/2018	Deferred gain on sale of building	20,025
		Gain on sale of building		20,025
	To record the entry for gain recognition as per IFRS.

B)

No.	Date	General Journal	Debit	Credit
1	12/31/2017	Deferred gain on sale of building	60,075
		Gain on sale of building		60,075
	To record the entry for deferring gain on sale of building which was previously recognized in Profit and loss account due to conversion from U.S. GAAP to IFRS
2	12/31/2018	Deferred gain on sale of building	60,075
		Retained Earnings		60,075
	To record the entry for deferring gain on sale of building which was previously recognized in Profit and loss account due to conversion from U.S. GAAP to IFRS.
3	12/31/2018	Gain on sale of building	20,025
		Deferred gain on sale of building		20,025
	To record the entry for reversing part of deferred gain already recognized in Profit and Loss account as per U.S. GAAP

Calculation

Building - net, 1/1/17	510,000
Gain on sale of building, 1/1/17	80,100
Life of leaseback	4

2017:

U.S. GAAP:

Gain recognized in 2017 = 80,100 / 4 = 20,025

IFRS :

Entire 80,100 would be recognized

Conversion from U.S. GAAP to IFRS 2017:

Carrying amount = 80100 - 20,025 = 60,075

60,075 need to be derecognized.

Additional $60,075 gain on sale of building must be recognized.

Conversion Worksheet, 12/31/17

Account	U.S.GAAP	Debit	Credit	IFRS
Gain on sale of building	(20,025)		60,075	(80,100)
Net income, 2017	(20,025)			(80,100)
Retained earnings, 1/1/17	-			-
Retained earnings, 12/31/17	(20,025)			(80,100)
Cash	590,100			590,100
Building	(510,000)			(510,000)
Total assets	80,100			80,100
Deferred gain on sale of building	(60,075)	60,075		-
Total liabilities	(60,075)			-
Retained earnings, 12/31/17 (above)	(20,025)			(80,100)
Total liabilities and equity	(80,100)			(80,100)

2018 :

U.S. GAAP:

Additional deferred gain on sale of building would be recognized in 2018 = 80,100 / 4 = 20,025

The deferred gain balance = 60,075 - 20,025 = 40,050

IFRS :

No entries needed.

Gain from the sale and leaseback was fully recognized in 2017.

Conversion from U.S. GAAP to IFRS 2018:

Carrying amount =  60,075 - 20,025 = 40,050

40,050 need to be derecognized.

$20,025 gain on sale of building must be eliminated.

In IFRS,retained earnings on 1/1/18 is understated by $60,075

Partial Conversion Worksheet, 12/31/18

Account	U.S.GAAP	Debit	Credit	IFRS
Gain on sale of building	(20,025)	20,025		-
Net income, 2018	(20,025)			-
Retained earnings, 1/1/18	(20,025)			(80,100)
Retained earnings, 12/31/18	(40,050)		60,075	(80,100)
Cash	590,100			590,100
Building	(510,000)			(510,000)
Total assets	80,100			80,100
Deferred gain on sale of building	(40,050)	60,075	20,025	-
Total liabilities	(40,050)			-
Retained earnings, 12/31/18 (above)	(40,050)			(80,100)
Total liabilities and equity	(80,100)			(80,100)