Loco Loco Company, a non-U.S. firm with shares listed on a U.S. stock exchange, reports the following financial information.
Net income, computed according to home country GAAP. . . . . . . . . . . . . . . . . . . . . . . $ 650,000
Stockholders’ equity, computed according to home country GAAP . . . . . . . . . . . . . . . . 5,200,000
Possible obligation for severance benefits to be paid
to employees in future years, recognized this year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,700,000
Goodwill recorded as a subtraction from equity
rather than as an asset (occurred three years ago). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,200,000
If Loco Loco were following U.S. GAAP, the goodwill would have been recorded as an asset. According to U.S. GAAP, the possible obligation for severance benefits would not be recognized until it had become probable. Using the U.S. goodwill impairment test, a goodwill impairment loss of $290,000 would have been recognized at the end of the year; goodwill was not impaired as of the end of last year.
Instructions:
1. Prepare a reconciliation of Loco Loco’s reported stockholders’ equity of $5,200,000 to U.S. GAAP.
2. Reconcile Loco Loco’s reported net income of $650,000 to U.S. GAAP.
3. Loco Loco has reported income averaging $550,000 per year for the past five years. During the current year, sale of investment property created an unusual gain of $1,900,000. Why do you think that Loco Loco chose to recognize the obligation for possible future severance benefits this year rather than waiting to recognize the obligation in a future year?