Question

Mikkeli OY acquired a brand name with an indefinite life in 2015 for 40,000 markkas. At December 31, 2017, the brand name could be sold for 35,000 markkas, with zero costs to sell. Expected cash flows from the continued use of the brand are 42,000 markkas, and the present value of this amount is 34,000 markkas. Assume that a foreign company using IFRS is owned by a company using U.S. GAAP. Thus, IFRS balances must be converted to U.S. GAAP to prepare consolidated financial statements. Ignore income taxes. Required: Prepare journal entries for this brand name for the year ending December 31, 2017, under (1) IFRS and (2) U.S. GAAP. Prepare the entry(ies) that the U.S. parent would make on the December 31, 2017 and December 31, 2018 conversion worksheet to convert IFRS balances to U.S. GAAP.

Answer 1

Answer and Explanation:

The journal entries are shown below:

As per the data given in the question,

1) Journal entry for loss on impairment as per IFRS:

Dec-31,2017

Loss on impairment A/c Dr. 5,000

To Brands Cr. 5,000

(To record impairment loss on brands)

In this case, the carrying value of brand is 40,000 and it exceeds both fair value of 35,000 and discounted value of 34,000, therefore an impairment loss :

Carrying value of brand = 40,000

Fair value of brand = 35,000

Loss on impairment = 40,000-35,000 = 5,000

2) Journal entry for loss on impairment as per GAAP

The journal entry is recognized when the carrying amount is more than the

undiscounted present value of cash flows future value

where,

Future undiscounted cash flow $42,000

And, the carrying value is $40,000

So in this case the carrying value is less than the discounted future cash flow so no journal entry is recorded as no impairment of loss would be recognized

Now the journal entries when convert is made from IFRS to GAAP

On Dec 2017

Brand Dr $5,000

To Loss on impairment $5,000

(Being the reverse entry is recorded)

On Dec 2018

Brand Dr $5,000

To Retained earning $5,000

(Being no impairment loss for year 2017 is reversed as per IFRS)