Exercise Example - Updated - Morning [PDF]

Zitiervorschau

IAS 2. Inventories

IAS2 (IFRS) Report on Balance Sheet: Value = Lower value (Historical Cost, Net Realizable Value)

U.S. GAAP Report on Balance Sheet: Value = Lower value (historical Cost, Market)

NRV = estimated selling price less costs of completion and other costs to make sale

Market = Replacement cost

Historic cost is constant over the life of the inventory Example Application of Lower of Cost or Net Realizable Value Rule Assume that Distributor Company Inc. has the following inventory item on hand at December 31, Year 1: Historical cost. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Replacement cost. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Estimated selling price . . . . . . . . . . . . . . . . . . . . . . . . . . . . Estimated costs to complete and sell . . . . . . . . . . . . . . . . . . Net realizable value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Normal profit margin—15% . . . . . . . . . . . . . . . . . . . . . . . . Net realizable value less normal profit margin . . . . . . . . . . .

$ 1,000.0 880.0 900.0 50.0 850.0 127.5 722.5

The journal entry at December 31, Year 1 related to Inventory under IFRS and U.S. GAAP IFRS U.S. GAAP Report on balance sheet value Report on balance sheet value = Lower value (historical Cost, NPV) = Lower value (historical Cost, replacement cost) = Lower value (1,000;850) = Lower value (1,000; 880) $850 $880 The journal entry at December 31, year 1 is Inventory Loss $150 Inventory $150

Inventory Loss Inventory

$120 $120

Jan 1, Y1

IFRS Inventory 1,000 150

Dec 31, Y1

Jan 1, Y1

850 U.S. GAAP Inventory 1,000 120

Dec 31, Y1

880

IAS 16. Property, Plant & Equipment (PPE)

IAS16 (IFRS) Component Depreciation

U.S. GAAP Component depreciation is not commonly

Example On January 1, Year 1, an entity acquires a new piece of machinery with an estimated useful life of 10 years for $150,000 The company has determined that the straight-line method of depreciation The component as following Component

Useful Life (years)

Cost ($)

Motor Inspection Machine ? Total ? 1.Calculate Depreciation Year 1 follow IFRS? 2.Calculate Depreciation Year 1 follow U.S. GAAP ? 1) IFRS Component

20,000 4,000

5 2 ?

Useful Life (years)

Cost ($)

Motor Inspection Machine Total

20,000 4,000 126,000 150,000

Depreciation Year 1 follow/under IFRS: $18,600 2) U.S. GAAP = $ 150000/10 Years $15,000 Depreciation Year 1 follow/under U.S. GAAP: $15,000

5 2 10

Depreciation 4,000 2,000 12600 18,600

ears for $150,000

IAS 36. Impairment Loss IAS 36, Impairment of Assets,requires impairment testing and recognition of impairment losses for property, plant, and equipment; intangible assets; goodwill; and investments in subsidiaries, associates, and joint ventures. It does not apply to inventory, construction in progress, deferred tax assets, employee benefit assets, or financial assets such as accounts and notes receivable IFRS Impairment means carrying amount (Book value) > recoverable amount:

U.S.GAAP Impairment means carrying amount > undiscounted future cash flows (Expected future cash Recoverable amount = greater value (Net selling price; flows) value in use) Net selling price = price in active market less disposal costs Value in use = Present Value of future net cash flows IFRS At December 31, year 1, Toca Company has equipment with the following: Carrying amount (Book value) Selling price Costs of disposal Expected future cash flows Present value of expected future cash flows Required: Under IFRS 1) Impairment or not impairment? Yes 2) How much? 3) Entry journal at Dec 31 Impairment Loss Equipment

$ 4,000 $ 4,000

Under U.S. GAAP 1) Impairment or not impairment? 2) How much? 3) Entry journal at Dec 31 Impairment Loss Equipment

50,000 Value in use 40,000 Net Selling Price 1,000 48,000 Recoverable amount 46,000

Carrying amount ($50,000) > Recove Impairment Loss = 50,000 - 46,000 = $4,000

U.S. GAAP Undiscounted future cash flows Carrying amount yes

$2,000 Because Carrying amount ($50,000) > undisc Impairment Loss = 50,000 - 48,000 =

$ 2,000 $ 2,000

II. Reversal of Impairment Loss Reverse if recoverable amount > new carrying amount Example for Reversal of Impairment Loss Equipment Jan 1, Year 1 Expectation useful life for 10 years with no residual val

55,000 Depreciation expense Y1 = 55,000/1 10

End of Year 1 Carrying amount (book value) Selling price Costs of disposal Present value of expected future cash flows Expected future cash flows

49,500 History cost - accumulated deprecia 40,000 1,000 55,000 46,000

End of year 2 Present value of expected future cash flows Net selling Price Expected future cash flows

50000 47000 51,000 = 55000 - (55000/10)*2

New carrying amount Recoverable amount = greater value (50,000; 47,000) = $50,000 Because Recoverable amount ($50,000) > new carrying amount ($44,000) -> Reversal of impairment loss Equipment $6,000 Reversal of impairment Loss (increase income) $ 6,000

History cost - accumulated deprecia 44,000

46,000 = 40,000 -1,000 39,000 = Greater value (Net selling price; value in use) = greater value (46,000; 39,000) 46,000 mount ($50,000) > Recoverable amount ($46,000) Loss = 50,000 - 46,000 = $ 4,000

ed future cash flows

48,000 50,000

mount ($50,000) > undiscounted FCF ($48,000) Loss = 50,000 - 48,000 = $ 2,000

n expense Y1 = 55,000/10 = 5,500

- accumulated depreciation

- accumulated depreciation

Home work. Applying IAS 36 Madison Company acquired a depreciable asset at the beginning of Year 1 at a cost of $12 million. At December 31, Year 1, Madison gathered the following information related to this asset: Carrying amount (net of accumulated depreciation). . . . . . . . . . . . . . . $10 million Fair value of the asset (net selling price) . . . . . . . . . . . . . . . . . . . . . . . . $7.5 million Sum of future cash flows from use of the asset . . . . . . . . . . . . . . . . . . $10 million Present value of future cash flows from use of the asset . . . . . . . . . . . $8 million Remaining useful life of the asset. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 years Requirement: Under IFRS and U.S. GAAP 1) Is asset impairment? 2) If yes, How much? 3) Journal entry at December 31, Year 1 IFRS value in use $8 Net selling price $7.50 Recoverable amount = greater value (value in use, net selling price) = $8 Carrying amount $10 1) Yes because carrying amount ($10) > Recoverable amount ($8) 2) Impairment Loss = Carrying amount - recoverable amount = $2 3) Journal entry Impairment Loss Asset U.S. GAAP Undiscounted cash flow Carrying amount

$2 $2

$10 $10

1) No impairment 2) No impairment Loss 3) No journal entry relate to impairment loss

Szabo Company Inc. incurred costs to develop a specific product for a customer in Year 1, amounting to $300,000. Of that amount, $250,000 was incurred up to the point at which the technical feasibility of the product could be demonstrated, and other recognition criteria were met. In Year 2, Szabo Company incurred an additional $300,000 in costs in the development of the product. The product was available for sale on January 2, Year 3, with the first shipment to the customer occurring in mid-February, Year 3 Year 1 Development cost Intangible asset Journal Entry (Not pay yet) Development expense Intangible asset Account payable

$250,000 $50,000 = 300,000 - 250,000 $250,000 $50,000 $300,000

Year 2 Development cost Intangible asset

$0 $300,000

Journal entry (Cash) Intangible asset Cash

$300,000 $300,000

t for a customer as incurred up to be demonstrated, any incurred an The product was o the customer

ISVNU Building Interest rate Year

VCB million VND 10 0.5%/mont 3

0.01

I) After 2 years, building is done Browing cost

Total building value

1.8

1.2

11.8

11.2

Assume that Rex Company Inc. has the following inventory item on hand at December 31, Year 1: History cost: $1,000; Replacement Cost: $900; Estimated selling price: $920; Estimated costs to complete and sell: $50;. How much Inventory loss year 1 under IFRS Inventory Loss NRV

920 50 870

Report on balance sheet

= lower value (Cost, NRV) = Lower value ($1,000; $870) $870

Inventory Loss

= $1000 - $870 $130

On January 1, Year 1, an entity acquires a new machine with an estimated useful life of 20 years for $100,000. The machine has an electrical motor that must be replaced every five years at an estimated cost of $20,000. Continued operation of the machine requires an inspection every four years after purchase; the inspection cost is $10,000. The company uses the straight-line method of depreciation. What is the depreciation expense for Year 1 under IFRS? Component 20,000 10,000 70,000 100,000

Year 5 4 20

Depreciation expense 4,000 2,500 3,500 10,000

on hand at 00; Estimated much Inventory

useful life of 20 aced every five ne requires an he company uses for Year 1 under

IAS37 Onerous Contract Year 1 Company A produces Shoes. It has a noncancelable lease contract with Company B on a building in USA. The lease expires on The annual lease payment is $100,000. However, In October, Year 1, the company A closes building in USA, moves to Mexico The company doesn't have any benefit from building in USA in year 2

1. Does company A have pay lease fee for Year 2? How much? $100,000

Yes

December 31, year 1 Noncancelable lease expense Provision for future lease payment

$100,000 $100,000

Extra question Company A pays company B the fee in the end of every year by bank Please journal entry related to lease payment on December 31, year 1 Lease expense Cash in bank Dr Cr

$100,000 $100,000

Noncancelable lease expense Cash In bank

$100,000 $100,000

g in USA. The lease expires on December 31, year 2, Operating lease

•Exchange rates are reflected both as US $ equivalent (direct quotes) and currency per US $ (ind

Today Direct quotes 1 FC = …….. USD

Indirect quotes 1 USD= …...FC

0.04264392

23.45

•A direct quote is the reciprocal of an indirect quote and vice-versa. Direct quote = 1/indirect quote indirect quote = 1/direct quote

Direct quotes 1 Forein Currency = ……….USD 1 EURO =1.3636 USD (Feb,15) 1 EURO 0.733352889 USD 1 POUND 1 USD

=1.5668 USD (Feb, 16) yuan (Feb 15) 6.835 Yuan

•Spot rate – today’s price for purchasing or selling a foreign currency. •Forward rate – today’s price for purchasing or selling a foreign currency for some ØPremium -- when the forward rate is greater than the spot rate for a particular day ØDiscount -- when the forward rate is less than the spot rate for a particular day.

Today April 6, 2020 1 VND = 0.0426 USD 1 VND = 0.0426 USD Spot rate for April 30, 2020 1 VND = 0.0427 USD 1 VND = 0.0425 USD Vietnamese Company selling product to US company make payment on april 30, 2020

Spot rate for April 6, 2020 Forward rate for April 30, 2020 Premium Discount

Foreign Currency Transaction

Example 1

•A Inc., a U.S. company, makes a sale and ships goods to B, SA, a Mexican custome •Sales price is $100,000 (U.S.) and A allowsB to pay in pesos in 30 days. •The current exchange rate is $0.10 per 1 peso. Suppose the peso decreases such that in 30 days the exchange rate is $0.09 per 1 pes US Company accounting Explaination:

Example 2

•A Inc., a U.S. c •Sales price is $ •The current ex Suppose in 30 da

1. Exporter: US Company (US dolar) 2. Transaction currency: Peso 1 Peso= 1,000,000 Day 1 Dr Cr

0.1 USD 100,000

Accounts Receivable Sales

$100,000 $100,000

Day 1 Dr Cr

Day 30 How much in US dolar does Company A receive? 1 Peso 0.09 USD 1,000,000 90,000

Company B need to pay how $100,000

Foreign Exchange Loss Accounts Receivable

$10,000 $10,000

Bank/Cash Accounts Receivable

$90,000 $90,000

Day 30 How much in US dolar does 1 Peso 952,381

Company have to pay

Forgeign exchange gain Or Foreign Exchange Loss

$10,000

Dr

Bank/Cash Accounts Receivable

$90,000 $100,000

Cr Cr Or Dr Cr Dr Cr

Transaction types, exposure type and gain or loss – export sales Foreign currency appreciates (Example 2) Day 1 Day 30

1 Peso 1 Peso

0.105 USD 0.11 USD

Day 1 Day 30

--> foreign exchange gain

Foreign currency depreciates (Example 1) Day 1 1 Peso Day 30 1 peso --> foreign exchange Loss

0.1 USD 0.09 USD

Import Purchase Example 1

•A Inc., a U.S. company, purchase product 1 from Company B, SA, a Vietnamese su •Product value is $100,000 (U.S.) and Company A have pay in Vietnam dong in 30 d •The current exchange rate is $0.0428 per 1 VND in Day 1 Suppose in 30 days the exchange rate is $0.0430 per 1 VND Day 1 Dr Product 1 $100,000 Cr Account Payable $100,000 How much money in VND company A have to pay? 1 VND 0.0428 USD 2,336,449 VND Day 30 1 VND

Dr Dr

0.043 USD 100,467.29 USD Foreign exchange Loss Account Payable

$ 467.29 $ 100,000.00

Cr Example 2

Bank

$ 100,467.29

•A Inc., a U.S. company, purchase product 1 from Company B, SA, a Vietnamese su •Product value is $100,000 (U.S.) and Company A have pay in Vietnam dong in 30 d •The current exchange rate is $0.0428 per 1 VND in Day 1 Suppose in 30 days the exchange rate is $0.0410 per 1 VND Day 1 Dr Product 1 $ 100,000 Cr Accounts Payable $ 100,000 How much money in VND company A have to pay? 1 VND 0.0428 USD 2,336,449 VND Day 30 1 VND

Dr Cr Cr

0.041 USD 95,794.39 USD Accounts Payable Foreign Exchange gain Bank

$ 100,000.00 $ 4,205.61 $ 95,794.39

d currency per US $ (indirect quotes).

currency. gn currency for some future date. ate for a particular day. for a particular day.

A, a Mexican customer. n 30 days.

ate is $0.09 per 1 peso •A Inc., a U.S. company, makes a sale and ships goods to B, SA, a Mexican customer. •Sales price is $100,000 (U.S.) and A allowsB to pay in pesos in 30 days. •The current exchange rate is $0.105 per 1 peso in day 1 Suppose in 30 days the exchange rate is $0.11 per 1 peso

Accounts Receivable Sales

$100,000 $100,000

Company B need to pay how much in Peso? $0.105

Company have to pay

952,381 Peso

How much in US dolar does Company A receive? 0.11 USD 104,761.90

orgeign exchange gain Bank/Cash

4,761.90 104,761.90

Foreign exchange gain Accounts Receivable

4,761.90 $100,000

Bank/Cash Accounts Receivable

$100,000 $100,000

Bank/Cash Foreign exchange gain

4,761.90 4,761.90

1 USD 1 USD

23.35 VND 23.25 VND

VND Appreciates

SA, a Vietnamese supplier. Vietnam dong in 30 days.

1 VND 1 VND

0.0428265525 USD 0.0430107527 USD

SA, a Vietnamese supplier. Vietnam dong in 30 days.

ican customer.

PROBLEM 1

On October 1,2019, Vin Company (Vietnam) purchases inventory from a foreign supplie (Japan) for 40,000 JPY. Payment will be made in 30 days. Required: Prepare all journal entries for Vin Company in connection with the purchase payment. The following exchange rates for 1 JPY apply: Note: Round percentages to two decimals place. Case 1 Case 1: Date JPY per VND October 1,2019 210.54 October 30,2019 212.67 Case 2 Date October 1,2019 October 30,2019

JPY per VND 210.54 212.67

PROBLEM 2

On September 1, Year 1, Keefer Company (U.S) received an order to sell a machine to a customer in Canada at a price of 100,000 U.S dollars. The machine was shipped on September 15, Year 1 and payment was received on October 15, Year 1. The following spot exchange rates apply: Case 1 Date September 1,2019 September 15,2019 October 15,2019

USD/CAD 1.39 1.40 1.41

Date September 1,2019

USD/CAD 1.39

Case 2

September 15,2019 October 15,2019

1.40 1.38

Required: Prepare all journal entries for Keefer Company (U.S) in connection with the selling and p

Note: Round percentages to two decimals place.

from a foreign supplier

on with the purchase and

on with the selling and payment.