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    1. Whicher Corporation had three products in its ending inventory at December 31, 2010. Whicher Corporation considers a profit margin of 15% of the sales price average for product 1 and a profit margin of 10% of the sales price average for products 2 and for product 3. When Whicher Corporation sells its products, it expects to incur selling costs equal to 5% of the selling price. The chart below gives further information about each product:
    Product Cost Replacement cost Selling price
    Product 1 $150 $160 $180
    Product 2 180 155 160
    Product 3 140 115 140

    What is the amount of write-down (if any) required using IFRS? Calculate the write-down on an individual basis. Provide necessary journal entries for the write-down.

    2. In 2013, Slim Drug Company began to notice problems with its obesity drug. The company stopped selling the drug near the end of 2013. In the last six months of 2014, the company was sued by 1,000 people who had an allergic reaction to the company's obesity drug. At the end of 2014, the company's attorneys believe there is a 60% chance the company will need to make payments in the range of $1,000 to $5,000 to settle each claim. At the end of 2015, while none of the cases have been resolved, the company's attorneys now believe there is an 80% chance the company will need to make payments in the range of $2,000 to $7,000 to settle each claim. In 2016, 400 claims were settled at a total cost of $1.2 million. Based on this experience, the company believes 30% of the remaining cases will be settled for $3,000 each, 50% will be settled for $5,000 and 20% will be settled for $10,000 each.

    Under IFRS, show necessary journal entries in 2013, 2014, 2015 and 2016. Write "N/A" if you believe no journal entries are necessary.

    3. A company acquired its only building on January 1, 2010, at a cost of $4 million. The building has a 20-year life and is being depreciated on a straight-line basis. On December 31, 2011, the net book value of the building was $3.6 million. The company revalued the building when the fair value of the building was $3.78 million on December 31, 2011. On December 31, 2013, the company sold the building for $3.6 million.
    The company's accounting policy is to reverse a portion of the surplus account related to increased depreciation expense.

    4. Pharma, Inc. has identified a list of expenditures it believes to be intangible assets.
    Required: 8 points
    Which items would be recognized as an asset using IFRS?
    Item IFRS
    Patent purchased from a competitor
    Legal fees to defend the purchased patent
    Research on potential formulas before technical feasibility has been reached
    Development of new formulas, after feasibility and business plans have been established
    Legal fees for a patent for the newly developed formula
    Customer list purchased from a competitor
    Goodwill included in the purchase of Pills.com, Inc
    Internally developed marketing plan for new drugs

    5. Fixed assets are the primary asset of Old Line Manufacturing Company (Old Line). As of December 2012, Old Line is having liquidity problems. Old Line's borrowing base is limited to 60% of its net fixed assets. The CFO has been entertaining the idea of changing from US GAAP to IFRS. The bank has agreed to loan up to 60% of the net fixed assets regardless of whether Old Line uses US GAAP or IFRS for accounting purposes.
    Land A
    Land is carried at its historical cost of $4.0 million, while its fair value is $5.0 million.
    Building B
    Building B, with a 30-year life, was acquired 10 years ago at a cost of $60.0 million. The fair value of the building is estimated to be $40.0 million at the end of 2012.
    Equipment C
    On January 1, 2008, equipment C was acquired at a cost of $10.0 million. It had a 10-year service life with no estimated scrap value. At the end of 2012, there have been technological innovations that may have impaired this equipment, which now has an estimated fair value of $1.0 million. The future undiscounted cash flows from this equipment are estimated to be $5.0 million, while the discounted net present value of the expected cash flows is estimated to be $3.0 million.
    Equipment D
    This equipment was acquired at the beginning of the year in 2009 at a cost of $10.0 million. It had a six-year service life with a $1.0 million estimated scrap value. At the end of 2010, the equipment was believed to be impaired and it was written down by $2.0 million. At the end of 2012, it no longer appears any impairment reserve is necessary.
    Equipment E
    This piece of equipment was acquired at the beginning of the year in 2012 at a cost of $12.0 million. The service life is expected to be eight years and no net salvage value is expected. A major component of this equipment is the motor, which costs $4.0 million and must be replaced every four years.
    Required: 32 points
    a) Analyze and determine how each fixed asset item is reported using US GAAP and IFRS at the end of 2012. Assume the Company uses straight-line depreciation for all its fixed assets and takes a full year of depreciation in the year of the addition.
    b) Based on your analysis, determine which reporting, US GAAP or IFRS, best maximize the amount of net fixed assets for Old Line Manufacturing Company.

    6. A manufacturing company has a highly automated piece of equipment that produces specialized parts for automobiles. At December 31, 2007 the carrying value of the equipment was $1,600,000. The equipment has the following values:
    Fair value of the asset $ 1,750,000 (based on an independent appraisal)
    Fair value less costs to sell $ 1,250,000 (fair value above less $500,000 in disposal costs)
    Value in use $ 2,750,000 (based on the present value of future cash flows)
    Required: 20 points
    a. Determine impairment loss, if any, at December 31, 2007 under IFRS.
    b. Assume the company chose to revalue the equipment at December 31, 2007, how much would the equipment be reported under the revaluation model?
    c. Discuss similarities and differences between impairment and revaluation for PP&E under IFRS.

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    Solution Summary

    Property plant and equipment cost and its impairment
    recording of provisions for four years