Question

On February 1, 2021, the Xilon Corporation issued 47,000 shares of its no-par common stock in exchange for five acres of land located in the city of Monrovia. On the date of the acquisition, Xilon's common stock had a fair value of $16 per share. An office building was constructed on the site by an independent contractor. The building was completed on November 2, 2021, at a cost of $6,800,000. Xilon paid $4,400,000 in cash and the remainder was paid by the city of Monrovia.

Assuming that Xilon prepares its financial statements according to International Financial Reporting Standards, select all the correct alternatives the company has for recording the acquisition of the office building.

a. Same treatment as GAAP.
b. Deduct the amount of the grant in determining the initial cost of the office building.
c. Record the grant as a liability, deferred income, in the balance sheet and recognize it in the income statement systematically over the office building's useful life.

Answer 1

Xilon Corporation has three alternatives for recording the acquisition of the office building according to International Financial Reporting Standards (IFRS): record the grant as a liability and recognize it over the building's useful life, apply the same treatment as GAAP, or deduct the grant amount from the initial cost of the building.

Step-by-step explanation:

According to International Financial Reporting Standards (IFRS), Xilon Corporation has the following options for recording the acquisition of the office building:

Record the grant as a liability, deferred income, in the balance sheet and recognize it in the income statement systematically over the office building's useful life. This option requires Xilon to record the grant as a liability on its balance sheet and recognize it as income over the useful life of the office building.

Same treatment as GAAP. Xilon can choose to apply the same treatment as Generally Accepted Accounting Principles (GAAP), which may involve depreciating the building and not recognizing the grant separately.

Deduct the amount of the grant in determining the initial cost of the office building. Alternatively, Xilon can deduct the amount of the grant from the initial cost of the office building, reducing its value on the balance sheet.

Each alternative has its own financial reporting implications, and Xilon must carefully consider which option aligns with IFRS principles and their reporting objectives.

Answer 2

a. Same treatment as GAAP.

Step-by-step explanation:

the journal entry should be:

Dr Land 752,000

Dr Building 6,800,000

Cr Common stock 752,000

Cr Cash 4,400,000

Cr Donation revenue 2,400,000

the donation is not a deferred liability, nor the basis of the building be reduced by it.