Solution Problem Acc for Inflation
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PROBLEM: ACCOUNTING FOR INFLATION Problem 1 Sorocaba company is located in a highly inflationary country and in accordance with IAS 29 prepares financial statement on a general purchasing power (inflation-adjusted) basis through reference to changes in the general price index (GPI). The company had the following transactions involving machinery and equipment in its first two years of operations: Date Transaction Cost Useful Life GPI January 15, Year 1 March 20, Year 1 October 10, Year 1 December 31, Year 1 January 4, Year 2 December 31, Year 2 Purchase Machine X Purchase Machine Y Purchase Machine Z Sold Machine X $20,000 55,000 130,000 4 years 5 years 10 years 100 110 130 140 160 180 Required: Determine the amount that would be reported as machinery and equipment in accordance with IAS 29 on December 31, Year 1 and December 31, Year 2, balance sheets. Solution: Sorocaba Company December 31, Year 1 Original Restated Purchase Historical Restatement Historical Date Item Cost Ratio Cost 1/15/Y1 Machine X $ 20,000 140/100 $ 28,000 3/20/Y1 Machine Y 55,000 140/110 70,000 10/10/Y1 Machine Z 130,000 140/130 140,000 $205,000 $238,000 December 31, Year 2 Original Restated Purchase Historical Restatement Historical Date Item Cost Ratio Cost 3/20/Y1 Machine Y $ 55,000 180/110 $ 90,000 10/10/Y1 Machine Z 130,000 180/130 180,000 $185,000 $270,000 1
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Transcript of Solution Problem Acc for Inflation
PROBLEM: ACCOUNTING FOR DERIVATIVES & HEDGES
PROBLEM: ACCOUNTING FOR INFLATIONProblem 1
Sorocaba company is located in a highly inflationary country and in accordance with IAS 29 prepares financial statement on a general purchasing power (inflation-adjusted) basis through reference to changes in the general price index (GPI). The company had the following transactions involving machinery and equipment in its first two years of operations:DateTransactionCostUseful LifeGPI
January 15, Year 1March 20, Year 1
October 10, Year 1
December 31, Year 1January 4, Year 2December 31, Year 2Purchase Machine XPurchase Machine Y
Purchase Machine Z
Sold Machine X$20,00055,000
130,0004 years5 years
10 years100110
130
140
160
180
Required: Determine the amount that would be reported as machinery and equipment in accordance with IAS 29 on December 31, Year 1 and December 31, Year 2, balance sheets.Solution:
Sorocaba CompanyDecember 31, Year 1
OriginalRestated
PurchaseHistoricalRestatementHistorical
DateItemCostRatio
Cost
1/15/Y1Machine X$ 20,000
140/100$ 28,000
3/20/Y1Machine Y55,000
140/11070,000
10/10/Y1Machine Z130,000
140/130140,000
$205,000
$238,000
December 31, Year 2
OriginalRestated
PurchaseHistoricalRestatementHistorical
DateItemCostRatio
Cost
3/20/Y1Machine Y$ 55,000
180/110$ 90,000
10/10/Y1Machine Z130,000
180/130180,000
$185,000
$270,000
Alternatively, the restated historical cost at December 31, Year 2 could be determined as follows:
December 31, Year 2
RestatedRestated
Historical
Historical
Purchase
CostRestatementCost
DateItem(12/31/Y1)Ratio
(12/31/Y2)
3/20/Y1Machine Y$ 70,000
180/140$ 90,000
10/10/Y1Machine Z140,000
180/140180,000
$210,000
$270,000
Ignoring depreciation, machinery and equipment would be reported on the balance sheet at:
12/31/Y1 $238,000
12/31/Y2$270,000
Problem 2 Doner Company Inc. begins operations 0n January 1, Year 1. The companys unadjusted financial statements for the year ended December 31,Year 1, appear as follows:Balance sheets1/1/Y112/31/Y1
Cash and receivablePlant & Equipment, net.. Total ....
Payables ..
Contributed capital .
Retained earnings ..
Total ....$20,000
50,000
$70,000
$15,000
55,000
. - .$70,000$35,000
45,000
$80,000
$15,000
55,000
10,000
$80,000
Income statement, Year 1
Revenues .
Depreciation expense
Other expenses ..
Income ..$50,000
(5,000)
(35,000)
$10,000
Revenues and expenses occur evenly through the year; revenues and other expenses are realized in terms of monetary assets (cash and receivables)
General price indexes for Year 1 are as follows:
1/1/Y1
Average Y1 ..
12/31/Y1 100
120
150
Instructions
a. Calculate Doner Companys Year 1 purchasing power gain or loss on net monetary itemsb. Determine Doner Companys Year 1 income on a general purchasing power basis (ignore income taxes)
Soulution :
Doner Company
Calculation of Purchasing Power Loss
Net monetary assets, 1/1/Y1$5,000x 150/100 = $ 7,500
Plus: Increase in net monetary assets15,000x 150/120 =18,750
Net monetary assts, 12/31/Y1$20,000
$26,250
20,000
Purchasing power loss
$ 6,250
GPP Income Statement
Year 1
Revenues
$50,000x 150/120 =$ 62,500
Depreciation
(5,000)x 150/100 =(7,500)
Other expenses (incl. income taxes)(35,000)x 150/120 =(43,750)
Purchasing power loss (6,250)
Net income$ 5,000Good Luck PAGE 2
