a.
Create a worksheet for the restatement of income and
a.
Explanation of Solution
Net Income:
Net income is considered as profit for the business. It is obtained by subtracting all the expenses and losses incurred in the business from the earned revenue.
Retained Earnings:
Retained earnings are that part of profit which is kept to meet the unexpected expenses and losses. It can also be used for reinvestment.
Worksheet for restatement of income and retained earnings to U.S, GAAP for the year ended December 31, year 1:
Items |
Local GAAP (in $m) |
U.S. GAAP (in $m) |
Sales | ||
Less: Cost of goods sold | ||
Gross profit | ||
Less: Operating expenses | ||
Operating income | ||
Less: Interest expense | ||
Less: other expense | ||
Income before income taxes | ||
Provision for income taxes | ||
Net income | ||
Retained earnings (January 1) | ||
Dividends | - | - |
Retained earnings (December 31) |
Table (1)
Worksheet for restatement of balance sheet to U.S. GAAP for the year ended December 31, Year 1:
Items |
Local GAAP (in $m) |
U.S. GAAP (in $m) |
Assets | ||
Current assets: | ||
Cash | ||
Accounts receivable | ||
Inventories | ||
Total current assets(A) | ||
Fixed and long-term assets: | ||
Property, plant and equipment | ||
Long-term investments | ||
Deferred charges | ||
Total fixed and long-term assets (B) | ||
Total assets (A+B) | ||
Liabilities and stockholder’s equity | ||
Current liabilities: | ||
Accounts payable | ||
Accrued expenses | ||
Short-term debt | ||
Other current liabilities | ||
Total current liabilities (C) | ||
Long term liabilities: | ||
Long-term debt | ||
Deferred income taxes | ||
Other long term liabilities | ||
Total long-term liabilities (D) | ||
Total liabilities (E) (C+D) | ||
Stockholder’s equity: | ||
Capital | ||
Capital surplus | ||
Retained earnings | ||
Revaluation reserve | - | |
Unrealized gains (losses) | ||
Total stockholder’s equity (F) | ||
Total liabilities and stockholder’s equity (E+F) |
Table (2)
b.
Prepare reconciling entries for Year 2 reconciliation item.
b.
Explanation of Solution
Journalizing:
Journalizing is the process of recording the transactions of an organization in the order of happening of events. Based on these
Accounting rules for journal entries:
- To increase balance of the account: Debit assets, expenses, losses and credit all liabilities, capital, revenue and gains.
- To decrease balance of the account: Credit assets, expenses, losses and debit all liabilities, capital, revenue and gains.
To record inventory indirect costs:
Date | Account Title and Explanation | Post Ref. |
Debit ($) |
Credit ($) |
Y2 | Cost of goods sold | |||
Inventories | ||||
Retained earnings | ||||
(to record inventory indirect costs) |
Table (3)
- Since cost of goods sold is revenue and revenues are decreased. Hence, COGS is debited.
- Since inventories are an asset and assets are increased. Hence, inventories are debited.
- Since retained earnings are a liability and liabilities are increased. Hence, retained earnings are credited.
To record revaluation of property, plant and equipment:
Date | Account Title and Explanation | Post Ref. |
Debit ($) |
Credit ($) |
Y2 | Revaluation reserve | |||
Property, plant and equipment | ||||
Operating expenses ( | ||||
(to record revaluation ) |
Table (4)
- Since revaluation reserve is a liability and liabilities are decreased. Hence, revaluation reserve is debited.
- Since property, plant and equipment is an asset and assets are decreased. Hence, property, plant and equipment are credited.
- Since operating expense is an expense and expenses are decreased. Hence, operating expense is credited.
To record capitalized interest:
Date | Account Title and Explanation | Post Ref. |
Debit ($) |
Credit ($) |
Y2 | Property, plant and equipment | |||
Operating expenses (depreciation) | ||||
Interest expense | ||||
Retained earnings | ||||
(to record capitalized interest) |
Table (5)
- Since property, plant and equipment is an asset and assets are increased. Hence, property, plant and equipment are debited.
- Since operating expense is an expense and expenses are increased. Hence, operating expense is debited.
- Since interest expense is a gain and gains are increased. Hence, interest expense is credited.
- Since retained earnings are a liability and liabilities are increased. Hence, retained earnings are credited.
To record deferred charges:
Date | Account Title and Explanation | Post Ref. |
Debit ($) |
Credit ($) |
Y2 | Operating expense | |||
Retained earnings | ||||
Deferred charges | ||||
Operating expenses (amortization) | ||||
(to record deferred charges) |
Table (6)
- Since operating expense is an expense and expenses are increased. Hence, operating expense is debited.
- Since retained earnings are a liability and liabilities are decreased. Hence, retained earnings are debited.
- Since deferred charges are an asset and assets are decreased. Hence, deferred charges are credited.
- Since operating expense is an expense and expenses are decreased. Hence, operating expense is credited.
To record government grants:
Date | Account Title and Explanation | Post Ref. |
Debit ($) |
Credit ($) |
Y2 | Retained earnings | |||
Property, plant and equipment | ||||
Operating expense (depreciation) | ||||
(to record government grants) |
Table (7)
- Since retained earnings are a liability and liabilities are decreased. Hence, retained earnings are debited.
- Since property, plant and equipment is an asset and assets are decreased. Hence, property, plant and equipment are credited.
- Since operating expense is an expense and expenses are decreased. Hence, operating expense is credited.
To record unrealized gain:
Date | Account Title and Explanation | Post Ref. |
Debit ($) |
Credit ($) |
Y2 | Other expenses | |||
Unrealized gain | ||||
Retained earnings | ||||
(to record unrealized gain) |
Table (8)
- Since other expenses are an expense and expenses are increased. Hence, other expenses are debited.
- Since unrealized gain is a gain and gains are increased. Hence, unrealized gain is credited.
- Since retained earnings are a liability and liabilities are increased. Hence, retained earnings are credited.
To record Employee Share Trust Agreements:
Date | Account Title and Explanation | Post Ref. |
Debit ($) |
Credit ($) |
Y2 | Treasury stock | |||
Long-term liabilities | ||||
(to record employee share trust agreements) |
Table (9)
- Since treasury stock is an asset and assets are increased, hence, treasury stock is debited.
- Since long-term liabilities are liability and liabilities are increased. Hence, long-term liabilities are credited.
Recording deferred tax effect of U.S. GAAP adjustments:
Date | Account Title and Explanation | Post Ref. |
Debit ($) |
Credit ($) |
Y2 | Deferred income taxes | |||
Retained earnings | ||||
Provision for income taxes | ||||
(to record adjustment to deferred tax) |
Table (10)
- Since deferred income taxes are an asset and assets are increased. Hence, deferred income taxes are debited.
- Since retained earnings are a liability and liabilities are decreased. Hence, retained earnings are debited.
- Since provision for income taxes is a liability and liabilities are increased. Hence, provision for income taxes is credited.
c.
c.
Explanation of Solution
Worksheet for restatement of income and retained earnings to U.S, GAAP for the year ended December 31, year 2:
Items |
Local GAAP (in $m) |
U.S. GAAP (in $m) |
Sales | ||
Less: Cost of goods sold | ||
Gross profit | ||
Less: Operating expenses | ||
Operating income | ||
Less: Interest expense | ||
Less: other expense | ||
Income before income taxes | ||
Provision for income taxes | ||
Net income | ||
Retained earnings (January 1) | ||
Dividends | - | - |
Retained earnings (December 31) |
Table (11)
d.
Calculate
d.
Explanation of Solution
On Local GAAP basis:
Calculation of current ratio:
The formula to calculate current ratio is,
Substitute
Thus, current ratio is
Calculation of total asset turnover:
The formula to calculate total asset turnover is,
Substitute
Thus, total asset turnover is
Calculation of debt/equity ratio:
The formula to calculate debt/equity ratio is,
Substitute
Thus, debt/equity ratio is
Calculation of times interest earned:
Substitute
Thus, times interest earned are
Calculation of net profit margin:
The formula to calculate net profit margin is,
Substitute
Thus, net profit margin is
Calculation of return on equity:
The formula to calculate return on equity is,
Substitute
Thus, return on equity is
Calculation of operating profit margin:
The formula to calculate operating profit margin is,
Substitute
Thus, operating profit margin is
Calculation of income as percent of total stockholders’ equity:
The formula to calculate IPTSE is,
Substitute
Thus, IPTSE is
On U.S. GAAP basis:
Calculation of current ratio:
The formula to calculate current ratio is,
Substitute
Thus, current ratio is
Calculation of total asset turnover:
The formula to calculate total asset turnover is,
Substitute
Thus, total asset turnover is
Calculation of debt/equity ratio:
The formula to calculate debt/equity ratio is,
Substitute
Thus, debt/equity ratio is
Calculation of times interest earned:
Substitute
Thus, times interest earned are
Calculation of net profit margin:
The formula to calculate net profit margin is,
Substitute
Thus, net profit margin is
Calculation of return on equity:
The formula to calculate return on equity is,
Substitute
Thus, return on equity is
Calculation of operating profit margin:
The formula to calculate operating profit margin is,
Substitute
Thus, operating profit margin is
Calculation of income as percent of total stockholders’ equity:
The formula to calculate IPTSE is,
Substitute
Thus, IPTSE is
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