15.

Beech Corporation – Inventory (LCNRV valuation)

Beech Corporation has three finished products (related to three different product lines) in its
ending inventory at December 31, Year 1. The following table provides additional
information about each product:

Replacement Selling
Product Cost Cost Price
101 $130 $140 $160
202 160 $135 $140
303 100 $90 $80

Beech Corporation expects to incur selling costs equal to 5 percent of the selling price on
each of the products.

Requred: Determine the amount at which Beech should report its inventory on the
December 31, Year 1, balance sheet under (1) IFRS and (2) U.S. GAAP.

IAS 2.29 indicates that inventories are usually written down to NRV item by item. Grouping
is acceptable when several criteria are met, including relating to the same product line.
Because these three products relate to three different product lines, grouping would not be
allowed.

Selling Selling LCNRV

price costs NRV (item by item)
Product Cost 12/31/Y1 (5%) 12/31/Y1 12/31/Y1
101 $130 $160 $8 $152 $130
202 160 $140 $7 $133 133
303 100 $80 $4 $76 76
Item-by-item $390 $339
total

Cost $390
LCNRV 339
Write-down $ 51

Inventory write-down expense $51

Inventory valuation allowance $51

Note: The use of the contra-account “Inventory valuation allowance” facilitates a possible
reversal of the write-down as is allowed under IAS 2.

Under the US GAAP,

Inventory write-down expense $51

Inventory $51
16. Beech Corporation – Inventory (reversal of write-down)

This is an continuation of problem 15. At December 31, Year 2, Beech Corporation still had
the same three different products in its inventory. The following table provides updated
information for the company’s products.

Replacement Selling
Product Cost Cost Price
101 $130 $180 $190
202 160 $150 $160
303 100 $100 $120

Beech Corporation still expects to incur selling costs equal to 5 percent of the selling price.

Required: Determine the amount at which Beech should report its inventory on the
December 31, Year 2, balance sheet under (1) IFRS and (2) U.S. GAAP.

IAS 2 indicates that an inventory write-down is reversed when, for example, inventory is still
on hand and its selling price has increased. The reversal is limited to the amount of the
original write-down. The new carrying amount should be the lower of original cost and
current NRV.

Carrying Selling Selling

Amount price costs NRV LCNRV
Product 12/31/Y1 Cost 12/31/Y2 (5%) 12/31/Y2 12/31/Y2
101 $130 $130 $190 $9.50 $180.50 $130.00
202 133 $160 $160 $8.00 $152.00 152.00
303 76 $100 $120 $6.00 $114.00 100.00
Item-by-item total $339 $390 $382.00

Inventory should be reported on the 12/31/Y2 balance sheet at LCNRV of $382. The
carrying amount at 12/31/Y1 is $339, so inventory must be written up by $43.

Carrying amount $339

LCNRV 382
Reversal of write-down $ 43

Inventory valuation allowance $43

Reversal of inventory write-down expense $43

At 12/31/Y2, the inventory valuation allowance has a credit balance of $8; the difference
between the original cost of $390 and LCNRV of $382.

Note: If LCNRV at 12/31/Y2 had been greater than $390, inventory could have been written
back up only to the original cost of $390. In other words, the inventory valuation allowance
would be reduced to zero, but will never have a net debit balance.

Under the US GAAP, no journal entry is needed. Because no additional write-downs are
required in Year 2, the inventory carrying amount would remain at $339.00
23. Stratosphere Company – Property, Plant, and Equipment (revaluation model)

Stratosphere Company acquires its only building on January 1, Year 1, at a cost of

$4,000,000. The building has a 20-year life, zero residual value, and is depreciated on a
straight-line basis. The company adopts the revaluation model in accounting for buildings.
On December 31, Year 2, the fair value of the building is $3,780,000. The company
eliminates accumulated depreciation against the building account at the time of revaluation.
The company’s accounting policy is to reverse a portion of the reevaluation surplus account
related to increased depreciation expense, On January 2, Year 4, the company sells the
building for $3,500,000.

Required: Determine the amounts to be reflected in the balance sheet related to this building
for Years 1-4 in the following table. (Use parentheses to indicate credit amounts.)

Amounts in parentheses represent credits.

Accumulated Carrying Revaluation Retained

Date Cost depreciation Amount Surplus Income Earnings
January 1, Year 1 4,000,000 4,000,000
December 31, Year 1 4,000,000 (200,000) 3,800,000 200,000 200,000
December 31, Year 2 4,000,000 (200,000) 3,600,000 200,000 200,000
December 31, Year 2 (220,000) 400,000 180,000 (180,000)
Balance 3,780,000 0 3,780,000 (180,000) 400,000
December 31, Year 3 3,780,000 (210,000)* 3,570,000 10,000 210,000 200,000
Balance 3,780,000 (210,000) 3,570,000 (170,000) 600,000
Sale, Jan 2, Year 4 (3,780,000) 210,000 (3,570,000) 170,000 70,000 (100,000)
Balance $– $ – $– $ – 70,000 500,000

* Calculated as $3,780,000 divided by remaining life of 18 years.

Note: The net impact on retained earnings over the life of the equipment is negative
$500,000 (debit), which is the difference between the purchase price of $4,000,000 and the
selling price of $3,500,000.

Journal entries to account for the building under the revaluation model

January 1, Year 1
Building 4,000,000
Cash 4,000,000

December 31, Year 1

Depreciation expense 200,000
Accumulated depreciation 200,000

December 31, Year 2

Depreciation expense 200,000
Accumulated depreciation 200,000
 Accumulated depreciation 400,000
Building 220,000 (4,000,000 - 3,780,000)
Revaluation surplus 180,000 (3,780,000 – 3,600,000)

 Dr. Accumulated depreciation 400,000

Cr. Building 400,000
Dr. Building 180,000
Cr. Revaluation surplus 180,000

December 31, Year 3

Depreciation expense 210,000 (3,780,000/18)
Accumulated depreciation 210,000

Revaluation surplus (OCI) 10,000 (180,000/18)

Retained earnings 10,000

January 2, Year 4
Cash 3,500,000
Accumulated depreciation 210,000
Loss on sale 70,000
Building 3,780,000 (book value: 3,570,000)

Revaluation surplus (OCI) 170,000

Retained earnings 170,000

Note: if the asset hadn’t been revalued, the carrying amount of the building would have been
$3,400,000 (cost of $4,000,000 less $200,000 depreciation x3 years) at the date of sale. If
the building was sold for $3,500,000, there would have been a gain of $100,000.

Since the building was revalued, the depreciation expense over the three years was
$610,000 ($200,000 in Year 1 and Year 2 and $210,000 in Year 3). Revaluation surplus
was reduced by $10,000 during this period with the credit applied directly to retained
earnings. Therefore, after reversing the remaining revaluation surplus of $170,000 to
retained earnings, the resulting loss is $70,000.

25. Buch Corporation – Property, Plant, and Equipment (impairment loss and subsequent
reversal of impairment loss)

Buch Corporation purchased Machine Z at the beginning of Year 1 at a cost of $100,000.

The machine is used in the production of Product X. The machine is expected to have a useful
life of 10 years and no residual value. The straight-line method of depreciation is used. Adverse
economic conditions develop in Year 3 that result in a significant decline in demand for Product
X. At December 31, Year 3, the company develops the following estimates related to Machine
Z.

Expected future cash flows $75,000

Present value of expected future cash flow $55,000
Selling price $70,000
Costs of disposal $7,000
At the end of Year 5, Buch’s management determines that there has been a substantial
improvement in economic conditions, resulting in a strengthening of demand for Product X. The
following estimates related to Machine Z are developed at December 31, Year 5:

Expected future cash flows $70,000

Present value of expected future cash flow $53,000
Selling price $50,000
Costs of disposal $7,000

Requred: Determine the carrying amounts for Machine Z to be reported on the balance sheet at
the end of Years 1-5., and amounts to be reported in the income statement related to Machine Z
for Years 1-5.

Cost $100,000
Useful life 10 years
Residual value $0
Annual depreciation charge $10,000

Year 1 Year 2 Year 3

Carrying value (at 1/1) $100,000 $90,000 $80,000
Depreciation expense (10,000) (10,000) (10,000)
Carrying value (at 12/31) $90,000 $80,000 $70,000

Test for impairment at December 31, Year 3:

Carrying value $70,000

Net selling price ($70,000 - $7,000) $63,000
Value in use $55,000
Recoverable amount (greater of the two) 63,000
Impairment loss $ 7,000

The impairment loss of $7,000 would be recognized in income on December 31, Year 3 with
an offsetting reduction in the asset’s carrying value. As a result, the asset will be reported at
on the December 31, Year 3 balance sheet at a carrying value of $63,000. This amount will
be depreciated over the remaining useful life of 7 years on a straight-line basis.

Year 1 Year 2 Year 3 Year 4 Year 5

Carrying value (at 1/1) $100,000 $90,000 $80,000 $63,000 $54,000
Depreciation expense (10,000) (10,000) (10,000) (9,000) (9,000)
Impairment loss (7,000)
Carrying value (at 12/31) $90,000 $80,000 $63,000 $54,000 $45,000

Review for reversal of impairment loss at December 31, Year 5:

Carrying value $45,000
Net selling price ($50,000 - $7,000) $43,000
Value in use $53,000
Recoverable amount (greater of the two) 53,000
Impairment loss $ 0
 IAS 36 requires an impairment loss to be reversed if the recoverable amount of an asset is
determined to exceed its new carrying amount, but only if there are changes in the
estimates used to determine the original impairment loss or there is a change in the basis
for determining the recoverable amount (from value in use to net selling price or vice versa).
Because recoverable amount has changed from net selling price at the end of Year 3 to
value in use at the end of Year 5, and the recoverable amount is greater than the carrying
value at the end of Year 5, the impairment loss recognized in Year 3 should be reversed.
However, the carrying value of the asset after reversal of the impairment loss should not
exceed what it would have been if no impairment loss had been recognized. The carrying
value of Machine Z at December 31, Year 5 would have been $50,000 if no impairment loss
had been recognized in Year 3 ($100,000 original cost less $10,000 annual depreciation for
five years). Thus, an increase in the carrying value of the asset of $5,000 should be
recognized at December 31, Year 5 with a reversal of impairment loss in an equal amount.
The asset’s carrying value on the December 31, Year 5 balance sheet will be $50,000
($45,000 + $5,000). This amount will be depreciated over the remaining useful life of 5
years on a straight-line basis.

Summary of amounts to be reported on the balance sheet and income statement in Years 1
– 5:
Year 1 Year 2 Year 3 Year 4 Year 5
Carrying value (at 1/1) $100,000 $90,000 $80,000 $63,000 $54,000
Income Statement
Depreciation expense (10,000) (10,000) (10,000) (9,000) (9,000)
Impairment loss (7,000)
Reversal of impairment loss 5,000
Carrying value (at 12/31) $90,000 $80,000 $63,000 $54,000 $50,000

Income statement effect (10,000) (10,000) (17,000) (9,000) (4,000)

Under U.S. GAAP, at the end of Year 3, impairment loss is computed as follows.

Carrying value $70,000

Undiscounted expected future cash flow $75,000

No impairment loss is recognized at the end of Year 3.

At the end of Year 5,

Carrying value $50,000

Undiscounted expected future cash flow $70,000

No impairment loss is recognized at the end of Year 5.

28. Lincoln Company – Research and Development Costs

In Year 1, in a project to develop Product X, Lincoln Company incurred research and

development costs totaling $10 million. Lincoln is able to clearly distinguish the research phase
from the development phase of the project. Research–phase costs are $6 million, and develop-
phase costs are $4 million. All of the IAS 38 criteria have been met for recognition of the
development costs as an asset. Product X was brought to market in Year 2 and is expected to
be marketable for five years. Total sales of Product X are estimated at more than $100 million.

a. Determine the impact research and development costs have on Lincoln Company’s Year
1 and Year 2 income under (1) IFRS and (2) U.S. GAAP.

a. IFRS Year 1 Year 2

Research expense $6 million
Deferred development costs (asset) $4 million
Amortization expense – deferred development costs $800,000

U.S. GAAP
Research and development expense $10 million --

b. Summarize the difference in income, total assets, and total stockholders’ equity related
to Product X over its five-year life under the two different sets of accounting rules.

b. IFRS result in $4 million larger income before tax in Year 1 and $800,000 smaller income
before tax in Years 2-6 compared to U.S. GAAP.

Ignoring income taxes, total assets and total stockholders’ equity are larger under IFRS by
the following amounts:

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6

$4,000,000 $3,200,000 $2,400,000 $1,600,000 $800,000
$0

36. Thurstone Company — Borrowing Costs (Capitalization)

Interest cost (£300,000 × 4% = £12,000 × $2.10 exchange rate on 3/31/Y1) $25,200

Less: Income earned on temporary investment (£5,000 × $2.10) (10,500)
Net interest cost $14,700
Plus: Exchange rate loss (£300,000 × ($2.10 − $2.00)) 30,000
Total borrowing cost to be capitalized under IFRS at 3/31/Y1 $44,700

Under U.S. GAAP, capitalized cost is $25,200.