2-2 Homework: Module Two Homework Assignment

1. Harrington Company was sued by an employee in late 2017. General counsel concluded that there
was an 70 percent probability that the company would lose the lawsuit. The range of possible loss is
estimated to be $32,000 to $76,000, with no amount in the range more likely than any other. The
lawsuit was settled in 2018, with Harrington making a payment of $63,000.
 
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 lawsuit for the years ending December 31, 2017, and December
31, 2018, under (1) U.S. GAAP and (2) IFRS.
b. Prepare the entry(ies) that Harrington would make on the December 31, 2017, and December
31, 2018, conversion worksheets to convert U.S. GAAP balances to IFRS.

Complete this question by entering your answers in the tabs below.

Prepare journal entries for this lawsuit for the years ending December 31, 2017, and December 31,
2018, under (1) U.S. GAAP and (2) IFRS. (If no entry is required for a transaction/event, select "No journal
entry required" in the first account field.)
Required A
JE 1 -- Record the entry for the litigation liability as per U.S. GAAP.
JE 2 -- Record the entry for the litigation liability as per IFRS.
JE 3 -- Record the entry for the settlement of litigation liability as per U.S. GAAP.
JE 4 -- Record the entry for the settlement of litigation liability as per IFRS.

Required B
JE 1 -- Record the conversion entry needed for 12/31/17.
JE 2 -- Record the conversion entry needed for 12/31/18.
2-2 Homework: Module Two Homework Assignment

eBook: LO 11-09 Determine the impact that specific differences between IFRS and U.S. GAAP have on
financial statements and prepare adjustments to convert IFRS balances to U.S. GAAP.
General Journal
Difficulty 1 Easy
Learning Objective: 11-09 Determine the impact that specific differences between IFRS and U.S. GAAP
have on financial statements and prepare adjustments to convert IFRS balances to U.S. GAAP.

Explanation
Summary of Facts:
Lawsuit initiated, 2017 70% probability of loss
Range of possible loss $32,000 − $76,000
Lawsuit settled, 2018 $63,000 payment

 
U.S. GAAP - 2017
In 2017, the company would recognize a litigation loss and litigation liability in the amount of
$32,000, the lowest amount in the range of possible loss.
IFRS
In 2017, the company would recognize a loss contingency and litigation liability in the amount of
$54,000 [($32,000 + $76,000) ÷ 2], the midpoint in the range of possible loss.
 
Conversion from U.S. GAAP to IFRS - 2017
To convert from U.S. GAAP to IFRS an additional loss and liability of $22,000 must be
recognized.
 
Partial Conversion Worksheet, 12/31/17
(amounts in $)   Conversion Entry  
Account U.S.GAAP Debit   Credit IFRS
Litigation loss 32,000   22,000       54,000 
Net income, 2017 32,000            54,000 
2-2 Homework: Module Two Homework Assignment

Retained earnings, 1/1/17 0            0 

Retained earnings, 12/31/17 32,000            54,000 
Cash 0            0 
Total assets 0            0 
Litigation liability (32,000)       22,000  (54,000)
Total liabilities (32,000)           (54,000)
Retained earnings, 12/31/17
32,000            54,000 
(above)
Total liabilities and equity 0            0 
      22,000    22,000    

Note: Parentheses reflect credit balances.

 
U.S. GAAP - 2018
In 2018, the company would recognize an additional litigation loss of $31,000, remove the
existing liability of $32,000, and record an outflow of cash of $63,000.
 
IFRS
In 2018, the company would recognize an additional litigation loss of $9,000, remove the
existing liability of $54,000, and record an outflow of cash of $63,000.
Conversion from U.S. GAAP to IFRS - 2018
From an IFRS perspective, U.S. GAAP understates the beginning balance in retained earnings by
$22,000 and overstates the 2018 litigation loss by the same amount.
 
Partial Conversion Worksheet, 12/31/18
(amounts in $)   Conversion Entry  
Account U.S.GAAP Debit   Credit IFRS
Litigation loss 31,000        22,000  9,000 
Net income, 2018 31,000            9,000 
Retained earnings, 1/1/18 32,000   22,000       54,000 
Retained earnings, 12/31/18 63,000            63,000 
Cash (63,000)           (63,000)
Total assets (63,000)           (63,000)
Litigation liability 0            0 
Total liabilities 0            0 
Retained earnings, 12/31/18
63,000            63,000 
(above)
Total liabilities and equity 63,000            63,000 
      22,000    22,000    

Note: Parentheses reflect credit balances.

2-2 Homework: Module Two Homework Assignment

2. Parnell Company acquired construction equipment on January 1, 2017, at a cost of $72,700. The
equipment was expected to have a useful life of five years and a residual value of $12,000 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 $67,800, a salvage value of $12,000, 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.
b. Prepare the entry(ies) that Parnell would make on the December 31, 2018 conversion
worksheet to convert U.S. GAAP balances to IFRS.

Complete this question by entering your answers in the tabs below.

Required A
Prepare the entry for this equipment for the years ending December 31, 2017, and December 31, 2018,
under (1) U.S. GAAP and (2) IFRS. (If no entry is required for a transaction/event, select "No journal entry
required" in the first account field.)
JE 1 -- Record the entry for depreciation expense as per U.S. GAAP.
JE 2 -- Record the entry for depreciation expense as per IFRS.
JE 3 -- Record the entry for the revaluation of equipment as per U.S. GAAP.
JE 4 -- Record the entry for the revaluation of equipment as per IFRS.
JE 5 -- Record the entry for depreciation expense as per U.S. GAAP.
JE 6 -- Record the entry for depreciation expense as per IFRS.
2-2 Homework: Module Two Homework Assignment

Required B
Prepare the entry(ies) that Parnell would make on the December 31, 2018 conversion worksheet to
convert U.S. GAAP balances to IFRS. (If no entry is required for a transaction/event, select "No journal
entry required" in the first account field.)
JE 1 -- Record the entry for recording profit on revaluation of equipment due to conversion from U.S.
GAAP to IFRS.
JE 2 -- Record the entry for additional depreciation expense on revaluation of equipment due to
conversion from U.S. GAAP to IFRS.

General Journal
Difficulty: 2 Medium
Learning Objective: 11-09 Determine the impact that specific differences between IFRS and U.S. GAAP
have on financial statements and prepare adjustments to convert IFRS balances to U.S. GAAP.
eBook: LO 11-09 Determine the impact that specific differences between IFRS and U.S. GAAP have on
financial statements and prepare adjustments to convert IFRS balances to U.S. GAAP.

Explanation
Summary of Facts:
Equipment
Cost, 1/1/17 $72,700 
Residual value $12,000 
Useful life   5 years
Straight-line per
$12,140
depreciation year
Fair value, 1/1/18 $67,800  
Residual value, 1/1/18 $12,000  
Useful life, 1/1/18   4 years

 
U.S. GAAP - 2017
In 2017, depreciation expense of $12,140 would be recognized under U.S. GAAP.
 
IFRS
2-2 Homework: Module Two Homework Assignment

On January 1, 2018, the Equipment would be revalued to its fair value of $67,800. This is
accomplished as follows: The 1/1/18 balance in Accumulated Depreciation-Equipment of
$12,140 is eliminated, and the Equipment account is written down from its historical cost of
$72,700 to its fair value on 1/1/18 of $67,800 (writedown of $4,900). This results in a net
increase in the carrying amount of Equipment of $7,240, which is offset by a credit to
Revaluation Surplus, which is a separate component of Accumulated Other Comprehensive
Income (AOCI).
 
The new carrying amount of Equipment of $67,800 is depreciated over its remaining useful life
of 5 years, at the rate of $13,950 per year [($67,800 − 12,000) ÷ 4 years].
 
Conversion from U.S. GAAP to IFRS - 2018
From an IFRS perspective, U.S. GAAP:
1. understates 2018 Depreciation Expense by $1,810,
2. understates Revaluation Surplus (AOCI) by $7,240,
3. overstates Equipment by $4,900, and
4. overstates Accumulated Depreciation-Equipment by $10,330.
 
The 12/31/18 partial conversion worksheet below summarizes the above entries, and shows that
the conversion entries result in the correct amounts being reported in the IFRS column.
 
Partial Conversion Worksheet, 12/31/18
(amounts in $)   Conversion Entry  
Account U.S.GAAP Debit   Credit IFRS
Depreciation expense 12,140 (2) 1,810        13,950 
Net income, 2018 12,140             13,950 
Retained earnings, 1/1/18* 12,140             12,140 
Retained earnings,
24,280             26,090 
12/31/18
Revaluation surplus (AOCI) 0       (1) 7,240  (7,240)
AOCI, 1/1/18 0             0 
AOCI, 12/31/18 0             (7,240)
Cash (72,700)           (72,700)
Equipment 72,700       (1) 4,900  67,800 
Accumulated depreciation-
(24,280)(1)12,140  (2) 1,810 (13,950)
equipment
Total assets (24,280)           (18,850)
Total liabilities 0             0 
AOCI, 12/31/18 (above) 0             (7,240)
Retained earnings,
24,280             26,090 
12/31/18 (above)
Total liabilities and
24,280             18,850 
equity
      13,950    13,950    
2-2 Homework: Module Two Homework Assignment

Note: Parentheses reflect credit balances.

 
* Reflects depreciation expense recognized in 2017.

3. Trecek Corporation incurs research and development costs of $654,000 in 2017, 30 percent of which
relate to development activities subsequent to IAS 38 criteria having been met that indicate an
intangible asset has been created. The newly developed product is brought to market in January 2018
and is expected to generate sales revenue for 10 years.
 
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 research and development costs for the years ending December 31,
2017, and December 31, 2018, under (1) U.S. GAAP and (2) IFRS.
b. Prepare the entry (ies) that Trecek would make on the December 31, 2017, and December 31,
2018, conversion worksheets to convert U.S. GAAP balances to IFRS.

Complete this question by entering your answers in the tabs below.

Required A
Prepare the entry for research and development costs for the years ending December 31, 2017, and
December 31, 2018, under (1) U.S. GAAP and (2) IFRS. (If no entry is required for a transaction/event,
select "No journal entry required" in the first account field.)
JE 1 -- Record the research and development costs as per U.S. GAAP.
JE 2 -- Record the research and development costs as per IRFS.
JE 3 -- Record the amortization expense as per U.S. GAAP.
JE 4 -- Record the amortization expense as per IFRS.
2-2 Homework: Module Two Homework Assignment

Required B
JE 1 -- Record the conversion entry needed for the research and development costs for 12/31/17.
JE 2 -- Record the conversion entry needed for the research and development costs for 12/31/18.
JE 3 -- Record the conversion entry needed for the amortization expense for 12/31/18.

eBook: LO 11-09 Determine the impact that specific differences between IFRS and U.S. GAAP have on
financial statements and prepare adjustments to convert IFRS balances to U.S. GAAP.
General Journal
Difficulty: 2 Medium
2-2 Homework: Module Two Homework Assignment

Learning Objective: 11-09 Determine the impact that specific differences between IFRS and U.S. GAAP
have on financial statements and prepare adjustments to convert IFRS balances to U.S. GAAP.

Explanation
Summary of Facts:
Research and Development Costs, 2017 $654,000 
% of 2017 R&D costs capitalizable under IFRS   30%
New product developed from 2017 R&D brought to
 January 2018
market
# of years new product will generate sales
  10 years
revenue

 
U.S. GAAP - 2017
Under U.S. GAAP, $654,000 of research and development costs would be expensed in 2017.
 
IFRS
In accordance with IAS 38, $457,800 [$654,000 x 70%] of research and development costs
would be expensed in 2017, and $196,200 [$654,000 x 30%] of development costs would be
capitalized as an intangible asset. The intangible asset will be amortized over its useful life of ten
years, but only beginning in 2018 when the newly developed product is brought to market.
 
Conversion from U.S. GAAP to IFRS - 2017
To convert from U.S. GAAP to IFRS on December 31, 2017, an intangible asset with a carrying
amount of $196,200 must be recognized, and net income must be increased by the same amount.
 
The 12/31/17 partial conversion worksheet shown below shows that this entry results in the
appropriate amounts being reported in the IFRS column.
 
Partial Conversion Worksheet, 12/31/17
(amounts in $)   Conversion Entry  
Account U.S.GAAP Debit   Credit IFRS
Development expense 654,000       196,200  457,800 
Amortization expense 0           0 
Net income, 2017 654,000           457,800 
Retained earnings, 1/1/17 0           0 
Retained earnings,
654,000           457,800 
12/31/17
Cash (654,000)         (654,000)
Intangible asset (net) 0  196,200       196,200 
Total assets (654,000)         (457,800)
Total liabilities 0           0 
Retained earnings,
654,000           457,800 
12/31/17 (above)
Total liabilities and 654,000           457,800 
2-2 Homework: Module Two Homework Assignment

equity
     196,200   196,200    

Note: Parentheses reflect credit balances.

 
U.S. GAAP - 2018
Because the research and development costs incurred in 2017 were fully expensed in that year,
no further entries are required in 2018 under U.S. GAAP.
 
IFRS
In 2018, the company would recognize $19,620 [$196,200 ÷ 10 years] of amortization expense
on the intangible asset (deferred development costs) under IFRS.
 
Conversion from U.S. GAAP to IFRS - 2018
To convert from U.S. GAAP to IFRS at December 31, 2018, an intangible asset with a carrying
amount of $176,580 [$196,200 - $19,620] must be recognized, and $19,620 of amortization
expense must be recorded. From an IFRS perspective, retained earnings on 1/1/18 is understated
by $196,200.
 
The partial conversion worksheet presented below shows the impact that the 2017 R&D costs
have on the 12/31/18 U.S. GAAP financial statements, and the amounts that would be reported at
that date under IFRS. The conversion entries prepared above accurately convert U.S. GAAP
balances to IFRS.
 
Partial Conversion Worksheet, 12/31/18
(amounts in $)   Conversion Entry  
Account U.S.GAAP Debit   Credit IFRS
Amortization expense 0 (2) 19,620        19,620 
Net income, 2018 0             19,620 
Retained earnings,
654,000 (1)196,200  457,800 
1/1/18        
Retained earnings,
654,000             477,420 
12/31/18
Cash (654,000)           (654,000)
Intangible asset (net) 0 (1)196,200  (2) 19,620  176,580 
Total assets (654,000)           (477,420)
Total liabilities 0             0 
Retained earnings,
654,000             477,420 
12/31/18 (above)
Total liabilities and
654,000             477,420 
equity
      215,820    215,820    

Note: Parentheses reflect credit balances.

2-2 Homework: Module Two Homework Assignment

4. The Securities Exchange Act of 1934

 Regulates the public trading of previously issued securities through brokers and exchanges.
 Requires the registration of investment advisers.
 Regulates the initial offering of securities by a company.
 Prohibits blue sky laws.

eBook: LO 12-02 Describe the purpose(s) of various federal securities laws.

Multiple Choice
Learning Objective: 12-02 Describe the purpose(s) of various federal securities laws.
Difficulty: 1 Easy

5. Which of the following is not a way by which the Sarbanes-Oxley Act attempts to ensure auditor
independence from an audit client?
 The audit committee must be composed of members of the client’s board of directors who are
independent of the management.
 The auditing firm must be appointed by the client’s audit committee.
 The external auditor cannot also perform financial information system design and implementation
work.
 Audit fees must be approved by the Public Company Accounting Oversight Board.

eBook: LO 12-03 Understand the Congressional rationale for enacting the Sarbanes-Oxley Act and the
responsibilities of the Public Company Accounting Oversight Board.
Multiple Choice
Learning Objective: 12-03 Understand the Congressional rationale for enacting the Sarbanes-Oxley Act
and the responsibilities of the Public Company Accounting Oversight Board.
Difficulty: 1 Easy

6. Which of the following must be provided to every potential buyer of a new security?
 A letter of comments.
 A Form S–16.
 A prospectus.
 A deficiency letter.

eBook: LO 12-06 Describe an issuer's registration process, various forms used by the issuers, and the
exemption(s) from registration.
Multiple Choice
Difficulty: 1 Easy
Learning Objective: 12-06 Describe an issuer's registration process, various forms used by the issuers,
and the exemption(s) from registration.

7. What is a shelf registration?

2-2 Homework: Module Two Homework Assignment

 A registration statement that the SEC formally rejects.

 A registration statement that the SEC rejects due to the lapse of a specified period of time.
 A registration form that is withdrawn by the registrant without any action having been taken.
 A registration process for large companies that allows them to offer securities over a period of time
without seeking additional approval by the SEC.

eBook: LO 12-06 Describe an issuer's registration process, various forms used by the issuers, and the
exemption(s) from registration.
Multiple Choice
Difficulty: 1 Easy
Learning Objective: 12-06 Describe an issuer's registration process, various forms used by the issuers,
and the exemption(s) from registration.

8. What is EDGAR?
 A system designed by the SEC to allow electronic filings.
 The enforcement arm of the SEC.
 A system the SEC uses to reject registration statements that do not contain adequate information.
 A branch of the government that oversees the work of the SEC.

eBook: LO 12-06 Describe an issuer's registration process, various forms used by the issuers, and the
exemption(s) from registration.
Multiple Choice
Difficulty: 1 Easy
Learning Objective: 12-06 Describe an issuer's registration process, various forms used by the issuers,
and the exemption(s) from registration.