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Chapter 15: Question 4IFRS (page 825)

Mary Tokar is comparing a GAAP-based company to a company that uses IFRS. Both companies report equity investments. The IFRS company reports unrealized losses on these investments under the heading “Reserves” in its equity section. However, Mary can find no similar heading in the GAAP-based company financial statements. Can Mary conclude that the GAAP-based company has no unrealized gains or losses on its non-trading equity investments? Explain.

Short Answer

Expert verified

No, Marry should not make that conclusion.

Step by step solution

01

Meaning of GAAP

Generally accepted accounting principles, or GAAP, are measures that cover the points of interest, complexities, and validity of the business and corporate bookkeeping. The Financial Accounting Standards Board (FASB) uses GAAP as the setting for a comprehensive set of ratified bookkeeping practices and practices.

02

Explaining the comparison made by Marry Tokar between GAAP and IFRS Company.

The Marry is drawing an off-base conclusion. While IFRS allows unrealized losses on non-traded equity investments to be expanded under "reserve," the U.S. GAAP requires that these misfortunes extend to other comprehensive income. Specifically, unrealized losses are detailed within the accumulated. US Other Comprehensive Income (Loss) Accounts Under GAAP.

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Most popular questions from this chapter

On February 1, 2017, Buffalo Corporation issued 3,000 shares of its \(5 par value common stock for land worth \)31,000. Prepare the February 1, 2017, journal entry.

Kellogg Company is the world’s leading producer of ready-to-eat cereal products. In recent years, the company has taken numerous steps aimed at improving its profitability and earnings per share. Presented below are some basic facts for Kellogg.

(in millions)

2014

2013

Net sales

\(14,580

\)14,792

Net income

632

1,807

Total assets

15,153

15,474

Total liabilities

12,302

11,867

Common stock, $0.25 par value

105

105

Capital in excess of par value

678

626

Retained earnings

6,689

6,749

Treasury stock, at cost

3,470

2,999

Number of shares outstanding (in millions)

358

363

Instructions

  1. What are some of the reasons that management purchases its own stock?
  2. Explain how earnings per share might be affected by treasury stock transactions.
  3. Calculate the debt to assets ratio for 2013 and 2014, and discuss the implications of the change.

Lindsey Hunter Corporation is authorized to issue 50,000 shares of \(5 par value common stock. During 2017, Lindsey Hunter took part in the following selected transactions.

  1. Issued 5,000 shares of stock at \)45 per share, less costs related to the issuance of the stock totaling \(7,000.
  2. Issued 1,000 shares of stock for land appraised at \)50,000. The stock was actively traded on a national stock exchange at approximately \(46 per share on the date of issuance.
  3. Purchased 500 shares of treasury stock at \)43 per share. The treasury shares purchased were issued in 2013 at $40 per share.

Instructions

  1. Prepare the journal entry to record item 1.
  2. Prepare the journal entry to record item 2.
  3. Prepare the journal entry to record item 3 using the cost method.

(Computation of Book Value per Share) Morgan Sondgeroth Inc. began operations in January 2015 and reported the following results for each of its 3 years of operations.

2015 \(260,000net loss 2016 \)40,000 net loss 2017 \(800,000 net income

At December 31, 2017, Morgan Sondgeroth Inc. capital accounts were as follows.

8% cumulative preferred stock, par value \)100;

authorized, issued, and outstanding 5,000 shares \(500,000

Common stock, par value \)1.00; authorized 1,000,000 shares;

issued and outstanding 750,000 shares \(750,000

Morgan Sondgeroth Inc. has never paid a cash or stock dividend. There has been no change in the capital accounts since Sondgeroth began operations. The state law permits dividends only from retained earnings.

Instructions

  1. Compute the book value of the common stock on December 31, 2017.
  2. Compute the book value of the common stock on December 31, 2017, assuming that the preferred stock has a liquidating value of \)106 per share.

The books of Conchita Corporation carried the following account balances as of December 31, 2017.

Cash \( 195,000

Preferred Stock (6% cumulative, nonparticipating, \)50 par) 300,000

Common Stock (no-par value, 300,000 shares issued) 1,500,000

Paid-in Capital in Excess of Par—Preferred Stock 150,000

Treasury Stock (common 2,800 shares at cost) 33,600

Retained Earnings 105,000

The company decided not to pay any dividends in 2017.

The board of directors, at their annual meeting on December 21, 2018, declared the following: “The current year dividends shall be 6% on the preferred and \(.30 per share on the common. The dividends in arrears shall be paid by issuing 1,500 shares of treasury stock.” At the date of declaration, the preferred is selling at \)80 per share, and the common at \(12 per share. Net income for 2018 is estimated at \)77,000.

Instructions

a) Prepare the journal entries required for the dividend declaration and payment, assuming that they occur simultaneously.

b) Could Conchita Corporation give the preferred stockholders 2 years’ dividends and common stockholders a 30 cents per share dividend, all in cash?
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