Question

In: Accounting

Abacab Company's shares are listed on the New Market Stock Exchange, which allows the use of...

Abacab Company's shares are listed on the New Market Stock Exchange, which allows the use of either international financial reporting standards (IFRS) or U.S. GAAP. On Jan 1, Year 1, Abacab Company acquired a building at a cost of $10 million. The building has a 20-yr. useful life and no residual value and is depreciated on a straight-line basis. On January 1, Year 3, the company hired an appraiser who determines the fair value of the building (net of any accumulated depreciation) to be $12 million.

IAS16, "Property, plant, and equipment," requires assets to be initially measured at cost. Subsequent to initial recognition, assets may be carried either at cost less accumulated depreciation and any impairment losses (the cost model) or at a revalued amount equal to fair value at the date of the revaluation less any subsequent accumulated depreciation and impairment losses (the revaluation model). If a firm chooses to use the revaluation model, the counterpart to the revaluation of the asset is recorded as an increase in Accumulated Other Comprehensive Income (stockholders' equity). Subsequent depreciation is based on the revalued amount less any residual value.
(U.S.GAAP) required items of property, plant, and equipment to be initially measured at cost. U.S.GAAP does not allow property, plant, and equipment to be revalued above original cost at subsequent balance sheet dates. The cost of property, plant, and equipment must be depreciated on a systematic basis over its useful life. Subsequent to initial recognition, assets must be carried at cost less accumulated depreciation and any impairment loss.

a) Determine the amount of depreciation expense recognized in Year 2, Year 3, and Year 4 under (a) the revaluation model of IAS 16 and (b) U.S. GAAP.
b) Determine the book value of the building under the two different sets of accounting rules at January 2, Year 3; December 31, Year 3; and December 31, Year 4.
C) summarize the difference in net income and in stockholders’ equity over the 20-year life of the building using the 2 different sets of accounting rules.                                              

Solutions

Expert Solution

a
Cost of the machine $ 10,000,000.00
year of Life of the machine 20
Annual depreciation $        500,000.00
Depreciation upto Jan- year 3 $    1,000,000.00
Book Value as on Jan-1 year 3 $    9,000,000.00
Increased Value $ 12,000,000.00
Remaining Life $    18.00
Annual Depreciation for remaining period $        666,666.67
IAS 16 US GAAP
Depreciation for year 2 $        500,000.00 $ 500,000.00
Depreciation for year 3 $        500,000.00 $ 500,000.00
Depreciation for year 4 $        666,666.67 $ 500,000.00
b
IAS 16
Year Beginning Depreciation Ending Value
1 $ 10,000,000.00 $      500,000.00 $    9,500,000.00
2 $    9,500,000.00 $      500,000.00 $    9,000,000.00
3 $ 12,000,000.00 $      666,666.67 $ 11,333,333.33
4 $ 11,333,333.33 $      666,666.67 $ 10,666,666.67
5 $ 10,666,666.67 $      666,666.67 $ 10,000,000.00
US GAAP
Year Beginning Depreciation Ending Value
1 $ 10,000,000.00 $      500,000.00 $    9,500,000.00
2 $    9,500,000.00 $      500,000.00 $    9,000,000.00
3 $    9,000,000.00 $      500,000.00 $    8,500,000.00
4 $    8,500,000.00 $      500,000.00 $    8,000,000.00
5 $    8,000,000.00 $      500,000.00 $    7,500,000.00
C. Under GAAP, Income will be charged 500,000 depreciation each year and no gain or loss on revaluation is recognized. Under IAS 16, Depreciation charge is 500,000 for the first 2 year. Thereafter 666,667 for each year. A Gain of 4 million is to be recognised as Accumulated Other Comprehensive Income in year 3. In both method the total over 20 years effect is same.

Related Solutions

Suncor Energy Inc. (SU) shares are listed on the New York Stock Exchange. At 9:30 a.m....
Suncor Energy Inc. (SU) shares are listed on the New York Stock Exchange. At 9:30 a.m. on January 14, 2016, these shares sold for $21.85 per share. The volatility on the returns of Suncor shares is approximately 24%. The following call and put option contracts were available for the months of January, February, and March: CALLS Strike/Expiry January 22, 2016 February 19, 2016 March 18, 2016 23 0.34 0.72 0.96 24 0.13 0.41 0.69 25 0.25 0.26 0.40 PUTS Strike/Expiry...
Select a company that is listed on the NASDAQ or New York Stock Exchange. Research the...
Select a company that is listed on the NASDAQ or New York Stock Exchange. Research the extent to which the company has an entrepreneurial culture. Does the company use product champions? Does it have a corporate venture capital fund? Do you believe its entrepreneurial efforts are sufficient to generate sustainable advantages.
King Ltd and Queen Ltd are both listed on the New York Stock Exchange having the...
King Ltd and Queen Ltd are both listed on the New York Stock Exchange having the same business risk. The expected return on the S&P 500 Index is 10% and the risk-free rate is 6%. These two firms are identical in all aspects except for their capital structure. Queen is an all-equity firm. King has both perpetual debts and common stocks. It has a debt to equity ratio of 1:4 and an equity beta which is equal to 1.25. Assume...
King Ltd and Queen Ltd are both listed on the New York Stock Exchange having the...
King Ltd and Queen Ltd are both listed on the New York Stock Exchange having the same business risk. The expected return on the S&P 500 Index is 10% and the risk-free rate is 6%. These two firms are identical in all aspects except for their capital structure. Queen is an all-equity firm. King has both perpetual debts and common stocks. It has a debt to equity ratio of 1:4 and an equity beta which is equal to 1.25. Assume...
King Ltd and Queen Ltd are both listed on the New York Stock Exchange having the...
King Ltd and Queen Ltd are both listed on the New York Stock Exchange having the same business risk. The expected return on the S&P 500 Index is 10% and the risk-free rate is 6%. These two firms are identical in all aspects except for their capital structure. Queen is an all-equity firm. King has both perpetual debts and common stocks. It has a debt to equity ratio of 1:4 and an equity beta which is equal to 1.25. Assume...
King Ltd and Queen Ltd are both listed on the New York Stock Exchange having the...
King Ltd and Queen Ltd are both listed on the New York Stock Exchange having the same business risk. The expected return on the S&P 500 Index is 10% and the risk-free rate is 6%. These two firms are identical in all aspects except for their capital structure. Queen is an all-equity firm. King has both perpetual debts and common stocks. It has a debt to equity ratio of 1:4 and an equity beta which is equal to 1.25. Assume...
The Walt Disney Company is listed as Ticker Symbol “DIS” on the New York Stock Exchange....
The Walt Disney Company is listed as Ticker Symbol “DIS” on the New York Stock Exchange. The Industry is listed under Consumer Services. Summarize in no more than 350 words the most frequently found long-term assets and long-term liabilities, as well as any unique assets or liabilities that were not common among the companies.
The Walt Disney Company is listed as Ticker Symbol “DIS” on the New York Stock Exchange....
The Walt Disney Company is listed as Ticker Symbol “DIS” on the New York Stock Exchange. The Industry is listed under Consumer Services. Determine what the company's policy is related to long-lived assets, goodwill, and other intangible assets. Identify what the company says about its annual goodwill impairment testing. Identify whether the company has any deferred tax assets and liabilities, and summarize what the company says about these items in the 10-K. Identify the disclosures related to long-term debt, leases,...
Listed below are the data for 20 companies in the New York Stock Exchange. Observation EPS...
Listed below are the data for 20 companies in the New York Stock Exchange. Observation EPS rating Industry group strength 1    81 B 2    58 C 3    84 B 4 21 C 5    87 C 6    14 C 7 46    B 8 76 B 9 84 B 10    70    A 11 72 A 12 79 D 13 82    A 14 21    D 15    57 B 16    76 A...
Greenwood ltd was listed at the Utopian stock exchange market ten years ago. The following table...
Greenwood ltd was listed at the Utopian stock exchange market ten years ago. The following table presents ten years of return data for the stock of Greenwood ltd and for the market index. Year 1 2 3 4 5 6 7 8 9 10 Greenwood ltd (%) 8.1 3.0 5.3 1.0 -3.1 -3.0 5.0 3.2 1.2 1.3 Market index (%) 8.0 0.0 14.9 5.0 14.1 18.9 10.1 5.0 1.5 2.4 Required Plot the returns of Greenwood ltd and the market...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT