exam case financial accounting
Solutions to Exercises and Problems Tutorial 1 IFM
Case 2-2
Case 2-2 SKD Limited
1. Goodwill
a. There is no goodwill amortization expense in Country A, so the goodwill amortization expense recognized by SKD must be added back to determine income under Country A GAAP.
SKD amortizes goodwill over a longer period (20 years) than is allowed in Country B (5 years), so an additional amount of goodwill amortization expense must be recognized to determine income under Country B GAAP, which reduces Country B GAAP income.
b. The goodwill adjustment affects the retained earnings in stockholders’ equity. The increase in Country A GAAP income results in an increase in retained earnings and the decrease in Country B GAAP income results in a decrease in retained earnings.
c. The adjustment to income is for the current year only. The adjustment to stockholders’ equity is cumulative. The fact that the stockholders’ equity adjustment is three times as larger as the income adjustment implies that the goodwill was purchased three year ago.
2. Capitalized Interest
a. The adjustment labeled “Capitalized interest” relates to the interest that is not expensed but instead is capitalized under Country A GAAP. The adjustment labeled “Depreciation related to capitalized interest” relates to the depreciation of the interest that was capitalized as part of the cost of the asset.
b. The first adjustment increases income because interest is not being expensed immediately but instead is capitalized as part of the cost of the asset to which it relates. The second adjustment decreases income because under Country A GAAP, the asset to which interest is capitalized has a larger cost and therefore a larger depreciation expense.
c. Both income adjustments are closed out to retained earnings and partially offset one another. The increase to income of $50 and the decrease of $20 result in a net increase in retained earnings of $30.
3. Fixed Assets
a. When fixed assets are
Case 2-2
Case 2-2 SKD Limited
1. Goodwill
a. There is no goodwill amortization expense in Country A, so the goodwill amortization expense recognized by SKD must be added back to determine income under Country A GAAP.
SKD amortizes goodwill over a longer period (20 years) than is allowed in Country B (5 years), so an additional amount of goodwill amortization expense must be recognized to determine income under Country B GAAP, which reduces Country B GAAP income.
b. The goodwill adjustment affects the retained earnings in stockholders’ equity. The increase in Country A GAAP income results in an increase in retained earnings and the decrease in Country B GAAP income results in a decrease in retained earnings.
c. The adjustment to income is for the current year only. The adjustment to stockholders’ equity is cumulative. The fact that the stockholders’ equity adjustment is three times as larger as the income adjustment implies that the goodwill was purchased three year ago.
2. Capitalized Interest
a. The adjustment labeled “Capitalized interest” relates to the interest that is not expensed but instead is capitalized under Country A GAAP. The adjustment labeled “Depreciation related to capitalized interest” relates to the depreciation of the interest that was capitalized as part of the cost of the asset.
b. The first adjustment increases income because interest is not being expensed immediately but instead is capitalized as part of the cost of the asset to which it relates. The second adjustment decreases income because under Country A GAAP, the asset to which interest is capitalized has a larger cost and therefore a larger depreciation expense.
c. Both income adjustments are closed out to retained earnings and partially offset one another. The increase to income of $50 and the decrease of $20 result in a net increase in retained earnings of $30.
3. Fixed Assets
a. When fixed assets are