IAS/IFRS PRACTICE PROBLEM
Global Corp., a new U.S.-based company, is interested in financial reporting under international accounting standards (IFRS). They have decided to account for their transactions under both U.S. GAAP and IFRS for a one-year period. At the end of the one-year period, they will prepare their financial statements and notes under each of the methods.
As the accountant, you are responsible for journalizing the transactions and preparing any necessary adjusting entries, ledgers, trial balances, financial statements, footnotes, etc.
January 1, 2005
1. Global issues 250,000 shares of $5 par value common stock for a total of $2,000,000.
2. Global issues 25,000 shares of mandatory redeemable preferred stock for $100 per share.
February 15, 2005
3. Global purchases 100,000 inventory items at a cost of $10 per item. Global will use the perpetual method and FIFO, if the methods are allowed. (Global pays cash.)
4. Global purchases land for use as a parking lot for its employees. The purchase price is $200,000. (Global pays cash.)
May 1, 2005
5. Global purchases marketable securities that it plans to hold as “available for sale” securities. Global pays $1,000,000 for 5,000 shares of Hewlett Hacker.
6. Global sells 5,000 of its inventory items and receives $14 cash per item.
June 30, 2005
7. Global leases two similar assets in two different manufacturing plants. The leases were separately negotiated. The assets each have an economic life of ten years and a seven-year lease. Global’s incremental borrowing rate is 6%. The leases neither transfer ownership nor have bargain purchase options. Additional details for each leased asset follow:
Asset A: Has a fair market value of $100,000 and payments under the lease are $15,000 each year. The first payment is due at the inception of the lease.
Asset B: Has a fair market value of $100,000 and payments under the lease are $15,500 each year. The first payment is due at the inception of the lease.
8. Global purchases a building as investment property and pays $110,000 cash.
9. Global purchases a building to be used in the production or supply of goods or services and pays $250,000 cash.
December 31, 2005
10. Global sells $1,350,000 face value of convertible bonds at a price of 101. Global realizes proceeds of $1,363,500. The ten-year bonds carry an interest rate (coupon rate) of 6% with interest paid semi-annually. The market rate for equivalent non-convertible bonds is 8%. The convertibility feature is not separable from the bonds. The fair value of the bond component is $1,166,531 determined as follows:
PV of principal repayment $ 616,122.50
PV PV of interest payments 550,408.50
Fair Value of bond at 8% $ 1,166,531
December 31, 2005
Additional Information:
1. The following information is available for the remaining inventory items purchased on February 15, 2005:
Net Realizable Value (NRV) = $9.10
Replacement Cost = $8.70
NRV minus normal profit margin = $8.05
2. The land purchased on February 15 is found to contain hazardous waste. The land is now determined to be worth only $170,000.
3. Hewlett Packard shares are now selling for $225/share on the equity market.
4. The building purchased as investment property, on June 30, is appraised at $130,000.
5. The building purchased to be used in the production or supply of goods or services, on June 30, is now determined to be worth $275,000.
6. Global annual depreciation for fixed assets is based on a pro rata monthly basis.Global uses the straight-line convention. Buildings and investment property have estimated useful lives of 10 years.
7. Ignore taxes for this exercise.