Application of International Financial Reporting Standards (IFRS) and GAAP

Required

Question 1 (2 marks)

White Company purchased equipment on January 1, 2015 for AED 1,000,000. The company uses the straight-line method of depreciation. Estimated useful life of the equipment is 10 years with zero net salvage value.

On December 31, 2017, the Company collected the following information

Required:

1. Was the asset impaired according to IAS 36? How much is the amount of impairment, if any? (1 mark)
2. How much is the amount of impairment, if any, under US GAAP? (1 marks

Question 2 (10 marks)

1. Red Rose Company is a real estate builder and developer. The Company started construction of a building for its own use in operations on January 1, 2015. The building was completed on December 31, 2016. It was ready for use on January 1, 2017.

The cost of constructing the building (including material, labor, and other manufacturing costs) amounted to twenty-four million dirhams. Fourteen million were spent in 2015 and the remaining ten million were spent in 2016.

Because of shortage of funds, the Company borrowed on January 1, 2016 ten million dirhams to finance the construction of the building and other general activities in the coming years. The borrowing rate was rate of 10% annual. The interest is to be paid at the end of each year with the principal amount to be paid after 5 years.

The Company uses the straight-line depreciation method. Estimated useful life of the building is 50 years with zero net salvage value.

Required

1. Determine the initial cost of the building as of January 1, 2017 (2 marks)
2. Provide the journal entries related to the building for the year 2017 (2 marks)
3. Assume that at the end of 2018, the Company decided to use the revaluation model to reflect the market value of the building of 48 million dirhams. Provide the journal entry (or entries) to reflect the effect of applying the revaluation model. Show your worked numbers to support your answers (2 marks)
4. Assume that at the end of 2020, the market value of the building was 45 million dirhams. provide the journal entry (entries) to reflect the effect of applying the revaluation model. Show your worked numbers to support your answers (2 marks)

Question 3 (7 marks)

The Holding Company of the Golden Group of the Emirate desires to have an executive aircraft to be used by its board members on official duties. A formal search was undertaken by a team representing the Group and its Associates to select an appropriate aircraft manufacturer. The team recommended Walton Company (an aircraft manufacturer that is located in Europe). An initial meeting was held last month and the discussion resulted in the selection of the aircraft type and model which has a fair value that is equivalent to 305 million dirhams. The aircraft would have an economic life of 25 years for the Holding Company. However the issue of financing the transaction was deferred until a further notice from the Holding Company. In the meantime, both sides outlined the following options to finance the transaction.

• The aircraft manufacturer can arrange for a loan from a bank at a reasonable interest rate with the security of the aircraft. However, the bank will require the Holding Group to sign a note with the borrowing agreement that specifies the period of payments and the periodic amount of payment that includes the principle amount and its interest.
• The Holding Group can lease the aircraft with the following terms

1. The manufacturer will maintain ownership of the aircraft until all payments are made.
2. The lease term will be for 20 years.
3. The annual lease payment will be 31,534,000 dirhams and to be paid at the beginning of each year. The first installment will be paid on the date of signing the lease.
4. The implicit interest rate of the aircraft manufacturer is 10% annually.
5. The Holding Group has the option to buy the aircraft at the end of the lease period for 5 million dirhams.
6. The Holding Group does not have the right to cancel the lease.

Required:

2017. Assume the lease was signed on January 1, 2017. Discuss the appropriate accounting treatment of the lease for the Holding Group of Dubai and how the lease will be shown on its financial statements on January 1, 2017 (2 marks)
2018. Construct the necessary journal entries related to the lease for 2017 on the books of the Holding Group (3 marks).

• Construct the necessary journal entries related to the lease for 2017 on the books of Walton Company (1 mark)

1. Why a company would prefer to lease rather than financing the purchase through a bank loan (1 mark)

Question 4 (6 marks)

West Corporation is a UAE Company located in Dubai. The Company has a subsidiary operating in Europe that was established on January 1, 2016 by investing six (6) million Euros when the exchange rate was AED 5.00 per Euro. On that date, the foreign subsidiary borrowed four (4) million Euros from a European bank on an eight-year note to finance the acquisition of plant and equipment. The subsidiary’s opening balance sheet (in Euros) was as follows:

Balance Sheet

January 1, 2016

During 2016, the foreign subsidiary generated sales of 20 million Euros and net income of four (4) million Euros. Dividends in the amount of 2,000,000 Euros were paid to the UAE Parent Company on December 5, 2016. Inventory was acquired evenly throughout the year, with ending inventory acquired on November 28, 2016. The subsidiary’s foreign financial statements (in Euros) for the year ended December 31, 2016 are presented below:

Income Statement

For the Year Ending December 31, 2016

Statement of Retained Earnings

Year 2016

Balance Sheet

December 31. 2016

Relevant exchange rates for 2016 were as follows (UAED per Euro):

Required:

1. Translate the subsidiary’s financial statements into UAE dirhams assuming that the Euro is the functional currency(4 marks).
2. Provide a schedule to verify the amount of the translation adjustment included in your solution to A Above (2 marks).

OR

Alternate Question 4 IFRS Statement of financial position presentation. ( 4 marks)

The following statement of financial position was prepared by the bookkeeper for Kraus Company as of December 31, 2015.

Kraus Company

Statement of Financial Position

as of December 31, 2015

Investments                                          £ 76,300                    Equity                                                                      £215,500

Equipment (net)                                         96,000                Non-current liabilities                                         100,000

Patents                                                           32,000                Accounts payable                                                   78,000

Inventories                                                    57,000

Accounts receivable (net)                       52,200

Cash                                                                 80,000

£393,500                                                                                                  £393,500

The following additional information is provided:

1. Cash includes the cash surrender value of a life insurance policy £12,400, and a bank overdraft of £2,500 has been deducted.
2. The net accounts receivable balance includes:

(a)  accounts receivable—debit balances £60,000;

(b)  accounts receivable—credit balances £4,000;

(c)   allowance for doubtful accounts £3,800.

3. Inventories do not include goods costing £5,000 shipped out on consignment. Receivables of £5,000 were recorded on these goods.
4. Investments include investments in ordinary shares, trading £19,000 and non-trading £48,300, and franchises £9,000.
5. Equipment costing £5,000 with accumulated depreciation £4,000 is no longer used and is held for sale. Accumulated depreciation on the other equipment is £40,000.

Instructions

Prepare a statement of financial position in good form (shareholders’ equity details can be omitted.)