Question

Hirsch Company acquired equipment at the beginning of 2017 at a cost of $124,300. The equipment has a five-year life with no expected salvage value and is depreciated on a straight-line basis. At December 31, 2017, Hirsch compiled the following information related to this equipment:                    Expected future cash flows from use of the equipment    $    106,400       Present value of expected future cash flows from use of the equipment        90,700       Fair value (selling price less costs to dispose)        86,350           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 Hirsch would make on the December 31, 2017, and December 31, 2018, conversion worksheets to convert U.S. GAAP balances to IFRS. Ignore the possibility of any additional impairment at the end of 2018.

Answer 1

Part 1 - Journal Entries (US GAAP)

Date	Accounts Title and Explanation	Debit	Credit
2017
January 1	Equipment	$124300
	Cash		$124300
	(Being Equipment purchased)
December 31	Depreciation ($124300/5)	$24860
	Accumulated Depreciation		$24860
	(Being Depreciation charged)
December 31	No entry for Impairment Loss (Note 1)
2018
December 31	Depreciation	$24860
	Accumulated Depreciation		$24860
	(Being depreciation recorded)

Part 2 - Journal Entries (IFRS)

Date	Accounts Title and Explanation	Debit	Credit
2017
January 1	Equipment	$124300
	Cash		$124300
	(Being Equipment Purchased)
December 31	Depreciation	$24860
	Accumulated Depreciation		$24860
December 31	Impairment loss (Note 2)	$8740
	Equipment		$8740
	(Impairment recorded)
2018
December 31	Depreciation (Note 3)	$22675
	Accumulated Depreciation		$22675
	(Being Depreciation Recorded)

Notes -

1) Impairment (US GAAP) - If Carrying value of equipment or Undiscounted future cash flows expected then there is impairment

Carrying value = ($124300-$24860) = $99440

Undiscounted future cash flow = $106400

Imapairment = NO Impairment since carrying amount is lower than undiscounted future cash flows.

2) Impairment (IFRS) - First, Impairment is tested by taking higher of present value of future cash flows or Fair value

then impairment is assessed is carrying value exceeds that higher value.

Carrying value = ($124300-$24860) = $99440

Higher of Fair value or Present value of future cash flows (higher of $90700 or $86350) = $90700

Impairment = ($99440 - $90700) = $8740

3) Depreciation

New Carrying value = ($99440 - $8740) = $90700

Remaining life = 4 years

Depreciation per year = ($90700/4) = $22675