Question One (14 Marks, 20 Minutes)
Trinity Ltd. is a privately owned medical technology company based in Moncton, NB that will be expanding substantially in the near future. It currently reports using ASPE but is considering moving to IFRS in the current year.
Based on drafts statements prepared using ASPE, preliminary accounts on December 31, Year-7, its Net Income is $150,000 and its Total Shareholder Equity is $3,000,000. You have identified the following areas in which Trinity’s accounting principles differ between ASPE and IFRS:
1.Development costs - Trinity incurred research and development costs of $45,000 in January 1, Year-7. 30% of these costs were related to development activities that met the criteria for capitalization as an intangible asset. The newly developed product was brought to market in March 01, Year-7 and is expected to generate sales revenue for 10 years.
2.Property, Plant and Equipment - Trinity acquired equipment at the beginning of Year-5 at a cost of $25,000. The equipment has an estimated useful life if 10 years, an estimated residual value of $5,000 and is being depreciated on a straight-line basis. On January1, Year-7, the equipment was appraised and determined to have a fair value of $18,000. It’s estimated useful life and residual value did not change. The company could adopt the revaluation option in IAS 16 to periodically revalue the equipment at fair value subsequent to acquisition.
3.Asset Impairment - Trinity acquired equipment at the beginning of Year-6 at cost of $100,000. The equipment has a five-year life and no expected residual value and is depreciated on a straight line basis. As at January 1, Year-7, Trinity compiled the following information related to the equipment:
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Expected future cash flows from use of equipment
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$85,000
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Present value of expected future cash flows from use of equipment
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75,000
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Net realizable Value
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72,000
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Question Two (16 Marks, 25 Minutes)
Company Yin Corp. paid $300,000 for a 30% interest in Company Yan on January 1, Year 6. During Year 6, Company Yan paid dividends of $100,000 and reported other comprehensive income (OCI) of $20,000 and profit as follows:
Profit before discontinued operations: $350,000
Discontinued operations loss (net of tax): $40,000
Profit $310,000
Company Yin profit for Year-6 consisted of $900,000 in sales, expenses of $110,000 and income tax expense of 330,000 and its investment income from Company Yan. Both companies have a tax rate of 40%.
Required:
(i)Assume that Company Yin reports its investment using the Equity Method. Prepare all the journal entries necessary to account for Yin’s investment for Year 6. Also, Determine the correct balance in Yin’s investment account at December 31, Year-6.
(ii)Assume that Company Yin reports its investment using the Cost Method. Prepare all the journal entries necessary to account for Yin’s investment for Year 6.
(iii)Prepare an income statement for Yin as at December 31, Year 6 under the Equity Method.
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