Principal Company Is a U

question 39

Essay

Principal Company is a U.S.-based company that prepares its consolidated financial statements in accordance with U.S. GAAP. Principal reported net income of $2,600,000 in 2013 and stockholders' equity of $12,000,000 at December 31, 2013. Principal wants to determine the reporting impact of switching to IFRS. The following three items would create differences in financial reporting:
1) At December 31, 2013, inventory had a historical cost of $850,000, a replacement cost of $700,000, and a net realizable value of $800,000. The normal profit margin was 10%.
2) Principal acquired a building at the beginning of 2011 at a cost of $5,000,000. The building has an estimated useful life of 20 years, an estimated residual value of $1,000,000, and is being depreciated on a straight-line basis. On January 1, 2013, the building has a fair value of $5,500,000. There is no change in the estimated useful life or residual value. In a switch to IFRS, Principal would use the revaluation model in IAS 16 to determine the carrying value of property, plant, and equipment subsequent to acquisition.
3) In 2013, Principal incurred $800,000 of research and development for a new product, of which 35% relates to development activities subsequent to the point at which criteria indicating the creation of an intangible asset had been met. As of the end of 2013, development of the new product had not been completed.
Required:
1) Prepare a schedule reconciling net income under U.S. GAAP to net income under IFRS for the year ended December 31, 2013.
2) Prepare a schedule reconciling stockholders' equity under U.S. GAAP to stockholders' equity under IFRS at December 31, 2013.

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Definitions:

Equity Method

A method of accounting in which an investor recognizes its share of the profits and losses of an investee company in proportion to its ownership interest.

Fair Values

The estimated price at which an asset or liability could be exchanged in an orderly transaction between market participants at the measurement date.

Goodwill Balance

The remaining value of goodwill on a company's balance sheet after accounting for amortization or impairment.

Identifiable Assets

Assets that can be separated from the business and sold, transferred, licensed, rented, or exchanged, either individually or together with a related contract.