Question - Marvin the Martian is confused about whether to prepare his financial statements in accordance with U.S GAAP or IFRS. Marvin asks you to prepare his company's financial statements under both frameworks using the information below.
Marv Corp operates a manufacturing facility on the Planet Mars, and has just completed its first year of trading. Marvin wishes to prepare 'strong' financials so that the company can offer an initial public offering on one of Earth's many stock exchanges. The company's trial balance at 1/31/2017 was as follows:
Trial balance for Marvin Company as at 1/31/2017
$000s $000s
Revenue 9,000
Common Stock ($1 shares) 8,200
Accounts receivable 300
Research and development expenditure 1,600
Patent legal costs 900
Beginning Inventory at February 1, 2016 0
Production materials used 1,000
Rental of temporary factory premises 600
Disposal of toxic factory waste 250
Freehold land at cost 800
Plant and equipment at cost 9,500
Administration costs 200
Distribution costs 150
Cash at bank 100
Manufacturing facility at cost (before interest capitalization) 7,000
Loan interest expense on construction loan (before capitalization) 2,100
Interest income on unused portion of construction loan 300
Construction loan 7,000
24,500 24,500
Appropriate accounting policies for non-current assets, inventory, and research and development must be established. The following information is made available:
Plant and equipment cost $9,500,000 and has an estimated useful economic life of four years and a residual value of $500,000. The straight line, double declining balance, or reducing balance methods of depreciation may be used to depreciate this asset.
On 1/31/2017, the plant and equipment was damaged by a death ray and must be tested for impairment. The following data is made available:
Net book value of plant and equipment (i.e. carrying value) at 1/31/2017 $?????????? Use your own net book value at 1/31/2017 Fair value (i.e. selling price) $6,000,000
Cost of asset disposal
Expected future cash flows from use
Present value of expected future cash flows from use
Note: the impairment has not been accounted for within the trial balance. Account for this, after depreciating the plant. If an impairment loss is recognized, this must be expensed in the income statement and added to the accumulated depreciation in the balance sheet.
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At 1/31/2017, the company's freehold land was valued at $2,000,000.
The ending inventory of finished goods at 1/31/2017 was valued on a first in, first out basis at $600,000, on a weighted average cost basis at $900,000 and a LIFO basis at $1,200,000. Assume that the ending inventories of raw materials and work in process are both zero.
On February 1 2016, the company signed a contract for the construction of its new factory building. To finance this expansion, the company obtained a $7,000,000 construction loan at an annual interest rate of 30% per year. The factory was completed on 1/31/2017. The total construction cost (excluding borrowing and interest costs) was $4,000,000.
The loan financed the construction of the factory. Construction fees of $5,000,000 were paid to the contractor on Feb 1 2016, with a further $2,000,000 paid to the contractor on Nov 1 2016. The unused portion of the construction loan was invested on the Martian money markets at 20% per annum.
During the year, the company incurred $900,000 of patent costs. On 11/1/2016, the company incurred $200,000 of legal fees to register a 10 year patent for the new manufacturing process. On 1/31/2017, the company incurred $700,000 of legal fees to successfully defend its patent in a Pluto court. The court's verdict did not increase the future value of the patent. If you choose to amortize the intangible patent cost(s), assume that there is no amortization during the year ended 1/31/2017.
Research ($500,000) and development expenditure ($1,100,000) were incurred researching, developing and completing a new manufacturing process. Development of the process is virtually complete and it will become operational on 2/2/2017. It will have a useful economic life of five years and no residual value. When development commenced, the company's engineers were sure of the technical and commercial feasibility of the project as it was expected to significantly reduce production costs.
Required:
Using accounting practices allowed under U.S. GAAP, prepare an income statement for Marv Corp for the year ended 1/31/2017 and a statement of financial position at that date that achieve the company's aim of impressing potential investors and lenders. Clearly list and explain all of the accounting policies that you used to produce this answer.
Using accounting practices allowed under IFRS, prepare an income statement for Marv Corp for the year ending December 1/31/2017 and a statement of financial position at that date that achieve the company's aim of impressing potential investors and lenders. Clearly list and explain all of the accounting policies that you used to produce this answer.
Briefly discuss which set of financial statements prepared in parts (a) and (b) should the company prefer to publish for the financial year ended 1/31/2017? Explain your answer.
Which set of financial statements provides the most information "useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity"?