Question

Parnell Company acquired construction equipment on January 1, 2017, at a cost of $75,000. The equipment was expected to have a useful life of five years and a residual value of $13,000 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 $69,300, a salvage value of $13,000, 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:

a. 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

(1) Record the entry for depreciation expense as per U.S. GAAP

(2) Record the entry for depreciation expense as per IFRS

(3) Record the entry for the revaluation of equipment as per U.S. GAAP

(4) Record the entry for the revaluation of equipment as per IFRS

(5) Record the entry for depreciation expense as per U.S. GAAP

(6) Record the entry for depreciation expense as per IFRS

b. Prepare the entry(ies) that Parnell would make on the December 31, 2018 conversion worksheet to convert U.S. GAAP balances to IFRS

(1) Record the entry for recording profit on revaluation of equipment due to conversion from U.S. GAAP to IFRS

(2) Record the entry for additional depreciation expense on revaluation of equipment due to conversion from U.S. GAAP to IFRS

Answer 1

Solution:

Straight line depreciation expenses under U.S.GAAP:

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	$75,000	$62,600
Less: Depreciation during the year	$12,400	$12,400
Book Value at the end of the year	$62,600	$50,200

Under IFRS as per IAS 16:

Book Value as on 1/1/17	$75,000
Less Depreciation ($75,000 - $13,000) / 5	($12,400)
Book Value as on 31/12/17	$62,600
Revalued figure as on 1/1/18	$69,300
Gain on Revaluation (Fair value as on 1/1/18 - Book Value as on 1/1/18) = ($69,300 – $62,600)	$6,700
Remaining Useful life	4 Yrs
Residual Value	$13,000
Depreciation during the year 2018 = ($69,300 - $13,000)/4	$14,075
Value of equipment as on 12/31/18 ($69,300 - $14,075)	$55,225

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	$62,600	$62,600	Nil
Depreciation during the year	$12,400	$12,400	Nil
2018
Value of equipment as on 12/31/18	$50,200	$55,225	$5,025
Depreciation during the year	$12,400	$14,075	($1,675)

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	$12,400
	Accumulated Depreciation – equipment		$12,400
	(Record the entry for depreciation expense as per U.S.GAAP)
12/31/2017	Depreciation Expenses	$12,400
	Accumulated Depreciation – equipment		$12,400
	(Record the entry for depreciation expense as per IFRS)
1/1/2018	No Journal Entry Required
	(Record the entry for the revaluation of equipment as per U.S.GAAP)
1/1/2018	Equipment	$6,700
	Gain on Revaluation of equipment at fair value		$6,700
	(Record the entry for the revaluation of equipment as per IFRS)
12/31/2018	Depreciation Expense	$12,400
	Accumulated Depreciation – equipment		$12,400
	(Record the entry for depreciation expense as per U.S.GAAP)
12/31/2018	Depreciation Expense	$14,075
	Accumulated Depreciation – equipment		$14,075
	(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	$5,025
	Gain on revaluation of equipment		$5,025
	(Record the entry for recording profit on revaluation of equipment due to conversion from U.S.GAAP to IFRS)
2	Depreciation Expense	$1,675
	Accumulated Depreciation- Equipment		$1,675
	(Record the entry for additional depreciation expense on revaluation of equipment due to conversion from U.S.GAAP to IFRS)