a.
Determine the appropriate accounting for this sale and leaseback for the years ending December 31, 2017, and December 31, 2018, under (1) IFRS and (2) U.S. GAAP.
a.
Explanation of Solution
(1)
IFRS:
The entry to be recorded under IFRS:
December 31, 2017:
Date | Accounting heads and explanation | Post Ref. | Debit (reais) | Credit (reais) |
1 Jan, 2017 | Cash | 200,000 | ||
Building (net) | 150,000 | |||
Gain on sale of building | 50,000 | |||
(To recognize the sale of a building and related gain) |
Table: (1)
December 31, 2018:
The entire gain on sale of building was recognized in 2017 therefore, there will be no further entries in 2018 under IFRS.
(2)
U.S. GAAP:
The entry to record equipment under U.S. GAAP:
December 31, 2017:
Date | Accounting heads and explanation | Post Ref. | Debit (reais) | Credit (reais) |
1 Jan, 2017 | Cash | 200,000 | ||
Building (net) | 150,000 | |||
Deferred Gain on sale of building | 50,000 | |||
(To recognize the sale of a building with deferral of the related gain) | ||||
Date | Accounting heads and explanation | Post Ref. | Debit (reais) | Credit (reais) |
31 Dec, 2017 | Deferred gain on sale of building | 5,000 | ||
Gain on sale of building | 5,000 | |||
(To amortize the deferred gain on sale of building over the term of lease (50,000/10)) |
Table: (2)
December 31, 2018:
Under US GAAP, an additional 5,000 reais of gain on sale of building will be recognized with an offsetting reduction in the deferred gain. The
Date | Accounting heads and explanation | Post Ref. | Debit (reais) | Credit (reais) |
31 Dec, 2017 | Deferred gain on sale of building | 5,000 | ||
Gain on sale of building | 5,000 | |||
(To amortize the deferred gain on sale of building over the term of lease (50,000/10)) |
Table: (3)
b.
Prepare the entry that the U.S. parent would make on the December 31, 2017, and December 31, 2018, conversion worksheets to convert IFRS balances to U.S. GAAP.
b.
Explanation of Solution
Conversion entries on December 31, 2017:
Date | Accounting heads and explanation | Post Ref. | Debit (reais) | Credit (reais) |
31 Dec, 2017 | Gain on sale of building | 45,000 | ||
Deferred gain on sale of building | 45,000 | |||
(To reverse the gain on sale of building recognized under IFRS0 |
Table: (4)
Below is the partial conversion worksheet below reflects that the conversion entry will result in the correct amount being reported under US GAAP as of 31 December 2017 (Table 6):
Partial conversion worksheet, 31/12/17 (Gain on sale and leaseback) | ||||
Conversion entries | ||||
Account | IFRS | Debit | Credit | U.S. GAAP |
Gain on sale of building | 50,000 | 45,000 | 5,000 | |
Net income (Positive) | 50,000 | 5,000 | ||
0 | 0 | |||
Retained earnings (31/12/17) | 50,000 | 5,000 | ||
Cash | 200,000 | 200,000 | ||
Buildings | 150,000 | 150,000 | ||
Total assets | 50,000 | 50,000 | ||
Deferred gain on sale of building (liability) | 0 | 45,000 | 45,000 | |
Total liabilities | 0 | 45,000 | ||
Retained earnings, 31/12/17 (above) | 50,000 | 5,000 | ||
Total liabilities and equity | 50,000 | 50,000 | ||
45,000 | 45,000 |
Table: (4)
Conversion entries on December 31, 2018:
Date | Accounting heads and explanation | Post Ref. | Debit (reais) | Credit (reais) |
31 Dec, 2017 | Retained earnings | 45,000 | ||
Gain on sale of building | 5,000 | |||
Deferred gain on sale of building | 40,000 | |||
(To reverse the gain on sale of building recognized under IFRS0 |
Table: (5)
Below is the partial conversion worksheet below reflects that the conversion entry will result in the correct amount being reported under US GAAP as of 31 December 2018 (Table 8):
Partial conversion worksheet, 31/12/18 (Gain on sale and leaseback) | ||||
Conversion entries | ||||
Account | IFRS | Debit | Credit | U.S . GAAP |
Gain on sale of building | 0 | 5,000 | 5,000 | |
Net income (Positive) | 0 | 5,000 | ||
Retained earnings (1/1/18) | 50,000 | 45,000 | 5,000 | |
Retained earnings (31/12/18) | 50,000 | 10,000 | ||
Cash | 200,000 | 200,000 | ||
Buildings | 150,000 | 150,000 | ||
Total assets | 50,000 | 50,000 | ||
Deferred gain on sale of building (liability) | 0 | 40,000 | 40,000 | |
Total liabilities | 0 | 40,000 | ||
Retained earnings, 31/12/18 | 50,000 | 10,000 | ||
Total liabilities and equity | 50,000 | 50,000 | ||
45,000 | 45,000 |
Table: (6)
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