Principal Company Is a U

question 31

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 2011 and stockholders' equity of $12,000,000 at December 31, 2011. 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, 2011, 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 2009 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, 2011, 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 2011, 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 2011, 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, 2011.
2) Prepare a schedule reconciling stockholders' equity under U.S. GAAP to stockholders' equity under IFRS at December 31, 2011.

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Definitions:

Positive Reinforcement

A strategy in behavior modification that involves the addition of a rewarding stimulus following a desired behavior.

Conditioned Stimulus

A conditioned stimulus is a previously neutral stimulus that, after being associated with an unconditioned stimulus, evokes a conditioned response.

Fear Conditioning

A behavioral paradigm in neuroscience and psychology where organisms learn to predict aversive events, developing a conditioned response to a previously neutral stimulus.

Human Infant

A very young offspring of a human, typically considered to be from birth to one year of age.