Assignment
1. from Thales annual report:
"At the end of 2002, a group of French manufacturers, including Thales and one of its subsidiaries, collectively received a request for arbitration relating to the execution of old contracts. ... In November 2012, the claimant filed a new request for arbitration for a revised amount of €226m. The parties are strongly challenging this claim and at this date it is not possible to evaluate any potential financial risk. Consequently, Thales has not recognised any provision."
What probability does Thales (a French company) assign to the likelihood of losing money as a result of this claim? What is the basis for that answer?
2. Under IFRS, companies may choose to revalue fixed assets. If that is a company's policy, is there any difference between recording downward revaluation and recording an impairment?
3. EuroParts uses specialized Machine X to manufacture plastic toy components that are sold to other toy manufacturers. In the third quarter of 2008, a competitor launched its own range of toy components that are selling at 50% less than EuroParts' components. EuroParts will find it difficult to match this pricing.
• The carrying value of Machine X is $35,000
• The value of Machine X on the second hand market is $12,000 and costs to sell the asset are expected to amount to $3,000
• Discounted net cash inflows from Machine X over the remaining useful life (including disposal proceeds) are $9,700.
What is the correct amount of impairment charge to be recorded in profit and loss under IFRS and US GAAP?
4. Are long-term liabilities recorded at cost or fair value. Explain your answer for IFRS, for US GAAP.
5. Thurstone Co., a US-based company borrows 1,500,000 British pounds on 1 Jan, Year 1, at an interest rate of 4% to finance the construction of a new office building for its employees in England. Construction is expected to take six months and cost 1,500,000 pounds. Thurstone temporarily invest the British pounds borrowed until cash is needed to pay costs. Interest earned in the first quarter of Year 1 is 5000 pounds. During the first quarter of Year 1, expenditures of 500,000 pounds are incurred; the weighted average expenditures are 300,000 pounds. Thurstone will repay the borrowing plus interest on 30 June, Year 1 by converting US dollars into British ponds. The US dollar/British pound exchange rate was $2.00 on 1 Jan, Year 1, and 2.10 on 31 March, Year 1. The exchange rate is the result of the difference in interest rates in the US and Great Britain.
Required
Determine the amount of borrowing costs (in US dollars) that Thurstone should include in the cost of the new building at 31 March, Year 1.
6. 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.
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Product
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Cost
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Replacement cost
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Selling price
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Normal profit margin
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101
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130
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140
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160
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20%
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202
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160
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135
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140
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20%
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303
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100
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80
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100
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15%
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Beech expects to incur selling costs equal to 5 percent 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,
• Under US GAAP
• Under IFRS
One year later, Beech still has the three different products in its inventory. The following table has information for the company's products on 31 December 2013.
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Product
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Cost
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Replacement cost
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Selling price
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Normal profit margin
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101
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130
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180
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190
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20%
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202
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160
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150
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160
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20%
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303
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100
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100
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130
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15%
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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,
• Under US GAAP
• Under IFRS
7. A company acquired its only building on January 1, 2010 at a cost of $5.0 million. The building has a 10 year life and is being depreciated on a straight-line basis. On December 31, 2010, the net book value of the building was $4.5 million. The company revalued the building when the fair value of the building was $4.75 million on December 31, 2010. On December 31, 2011, the company sold the building for $4.0 million. Determine what accounts would be afffected and, in table format, show the activity for the years 2010 and 2011. There is no need to show journal entries. Be sure to specify whether the sale gives a gain or a loss.
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Date
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Cost
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Accumulated depreciation
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Net
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Surplus account in equity -OCI
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Gain or Loss
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Retained earnings
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1 January 2010
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$5.0
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5.0
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31 December 2010
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0.5
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4.5
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Ending balance
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8. What is a "contingent asset?"
A) There is no such thing, in either IASB standards or U.S. GAAP, as a "contingent asset."
B) This is an asset which has been put up as collateral against a loan.
C) This is a possible inflow of resources arising from a future activity.
D) It is a probable asset whose existence is yet to be confirmed definitively by a future event.
9. Rive Rouge Confections Company incurred €5,000,000 to determine if chocolate could be made to resist melting by adding certain inert minerals to the mixture. According to IAS 38, how should Rive Rouge record this cost?
A) It should be capitalized as a Deferred Development Cost.
B) It should be treated as a cost of products it currently markets.
C) It should be expensed currently.
(It is a research cost.)
D) It should be amortized over 20 years.
10. A "cash generating unit" (CGU) in an IFRS company has recorded an impairment of goodwill. It presents you, the auditor, with the following information that is part of its analysis.
Carrying value of the CGU (includes goodwill): 3 million
Carrying value of that CGU's goodwill: 0.3 million
Fair value of CGU 4.5 million
Recoverable value of CGU: 4.5 million
What is the implied value of that CGU's goodwill (before an impairment, if any)?