QUIZ LF53

1. Beech Corp has three finished products (related to three different product lines) in its
ending inventory at 31 December 2012. The following table gives information about each
Replaceme
Normal Profit
Product
Cost
Selling Price
nt Cost
Margin
101
$130
$140
$160
20%
202
$160
$135
$140
20%
303
$100
$ 80
$100
15%
Beech expects to incur selling costs equal to 5% of the selling price on each of the
products.
Determine the amount at which Beech should report its inventory on the 31 December
2012 balance sheet, (1) Under US GAAP and (2) Under IFRS
Answer:
Produc
t
101
202
303

Cost
130
160
100

Replaceme
nt Cost
140
135
80
TOTALS

NRV

NRV-NPM

152
133
95

120
105
80

US GAAP
Market
130
133
80
343

IFRS
LCNRV
130
133
95
358

One year later, Beech still has the three different products in its inventory. The following
table has information for the companys products on 31 December 2013
Replaceme
Normal Profit
Product
Cost
Selling Price
nt Cost
Margin
101
$130
$180
$190
20%
202
$160
$150
$160
20%
303
$100
$100
$130
15%
Beech still expects to incur selling costs equal to 5% of the selling price. Determine the
amount at which Beech should report its inventory on the 31 December 2013 balance
sheet, (1) Under US GAAP and (2) Under IFRS
IFRS LCNRV
(31/12/12)
130
133
95
TOTALS

Product

Original Cost

NRV

101
202
303

130
160
1000

180.5
152
123.5

IFRS LCNRV
(31/12/13)
130
152
100
382

US: 130 + 133 + 80 = 343

IFRS: 130 + 152 + 100 = 382
US GAAP does allow inventory write-downs on a total basis, but IFRS does not (see slide 16)
. The
inventory is from three different product lines. If the calculations were done on a total basis
, the
numbers would be:
Part 1:
GAAP
Cost: 130 + 160 + 100 = 390
Replacement cost: 140 + 135 + 80 = 355
NRV: 152 + 133 + 95 = 380
NRV NPM: 128 + 112 + 81 = 321
Carrying value, end of period, is 355
IFRS
Cost: 390
NRV: 380
Carrying value, end of period, is 380

Part 2:
IFRS
Cost: 390
Written down value, beginning of period: 3
55
NRV, end of period: 181.5 + 152 + 123.5
= 456
Carrying value, end of period, is 390

2. Stevenson Corporation Property, Plant and Equipment (component

depreciation)
Stevenson Corporation acquires a one-year old building at a cost of $500,000 at the
beginning of Year 2. The building has an estimated useful life of 50 years. However, based
on reliable historical data, the company believes the carpeting will need to be replaced in 5
years, the roof will need to be replaced in 15 years, and the HVAC system will need to be
replaced in 10 years. On the date of acquisition, the cost to replace these items would have
been carpeting, $10,000; roof, $15,000; HVAC system, $30,000. Assume no residual value.
Required:
Determine the amount to be recognized as depreciation expense in year 2 related to this
building
Answer:
IAS 16.44 states: an entity allocates the amount initially recognized in respect of an item
of property, plant and equipment to its significant parts and depreciates separately each
such part. This is referred to as component depreciation. Thus, the total cost of
$500,000 must be allocated to carpeting, roof, HVAC system, and the rest of the building,
and each component is depreciated separately over its expected useful life.
Depreciable
Useful
Depreciati
Base
Life
on
Carpeting
$10,000
5 years
$2,000
Roof
$15,000
15 years
$1,000
HVAC
$30,000
10 years
$3,000
System
Building
$445,000
50 years
$8,900
Total
$500,000
$14,900
3. Zermatt Company ordered parts from a foreign spplier on November 20 at a price of
100,000 francs when the spot rat was $0.80 per peso. Delivery and payment were
scheduled for December 20. On November 20, Zermatt acquired a call option on !00,000
francs at a strike price of $0.80, payong a premium of $0.008 per franc. The option is
designated as a fair value hedge of a foreign currency firm commitment. The fair value of
the firm commitment is measured through reference to changes in the spot rate. The parts
are delivered and paid for accounting to schedule. Zermatt does not close its books until
December 31.
Required:
A. Assuming a spot rate of $0.83 per franc on December 20, prepare all journal entries
to account for the option and firm commitment
B. Assuming a spot rate of $0.78 per franc on December 20, prepare all journal entries
to account for the option and firm commitment
Spot
DateRate
11/20

Option
Premium
for 12/20
-

Foreign Currency Option

Change in
Fair Value
Fair Value
$.008
$800

a) 12/20

$.83

$(3,000)1

$3,000

$.030

$3,000 + $2,200

b) 12/20

$.78

$2,0002

+ $2,000

$.000

$0

1
2

a.

Firm Commitment
Change in
Fair Value
Fair Value
$.80
-

$800

$80,000 $83,000 = $(3,000).

$80,000 $78,000 = $2,000.

The option strike price ($.80) is less than the spot rate ($.83) on December 20, the date the parts
are to be paid for. Therefore, Zermatt will exercise its option. The journal entries are as follows:
11/20 Foreign Currency Option
Cash [$.80 x 100,000 francs]

$800
$400

There is no entry to record the sales agreement as it is an executory contract.

12/20 Loss on Firm Commitment
Firm Commitment
Foreign Currency Option
Gain on Foreign Currency Option

$3,000
$3,000
$2,200
$2,200

Foreign Currency (francs)

Cash
Foreign Currency Option

$83,000

Parts Inventory
Foreign Currency (francs)

$83,000

$80,000
3,000
$83,000

Firm Commitment
$3,000
Adjustment to Net Income
$3,000
(Note that this last entry is not made until the period when the parts inventory affects net income
through cost of goods sold.)
b. The option strike price ($.80) is greater than the spot rate ($.78) on December 20, the date the parts
are to be paid for. Therefore, Zermatt will allow the option to expire unexercised. Foreign currency
will be acquired at the spot rate on December 20. The journal entries are as follows:
11/20 Foreign Currency Option
Cash

$800
$800

There is no entry to record the sales agreement because it is an executory contract.

12/20 Firm Commitment
Gain on Firm Commitment
Loss on Foreign Currency Option
Foreign Currency Option

$2,000
$2,000
$800
$800

Foreign Currency (francs)

Cash

$78,000

Parts Inventory
Foreign Currency (francs)

$78,000

$78,000
$78,000

Adjustment to Net Income

$2,000
Firm Commitment
$2,000
(Note that this last entry is not made until the period when the parts inventory affects net income
through cost of goods sold.)