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With respect to the adjustments made by the analyst in Country B related to property, plant, and equipment, answer the following: 1. Why does the
With respect to the adjustments made by the analyst in Country B related to property, plant, and equipment, answer the following:
1. Why does the adjustment for depreciation related to revalued property, plant, and equipment decrease income, whereas the adjustment for revaluation of property, plant, and equipment increases stockholders' equity?
Case 2-2SKD LimitedSKD Limited is a biotechnology company that prepares financial statements using internally developed accounting rules (referred to as SKD GAAP). To be able to compare SKD's financial statements withthose of companies in their home country, financial analysts in Country A and Country B prepared a reconciliation of SKD's current year net income and stockholders' equity. Adjustments were based on theactual accounting policies and practices followed by biotechnology companies in Country A and Country B. The following table shows the adjustments to income and stockholders' equity made by eachcountry analyst:Country CountryAEIncome under SKD GAAP1,0501,050Adjustments: . . .Goodwill amortization . . .300(100)Capitalized interest .5050Depreciation related to capitalized interest .(20)(20)Depreciation related to revalued property, plant, and equipment.(8)Income under local GAAP .1,380972Stockholders' equity under SKD GAAP15,00015,000Adjustments:Goodwill . .900(300)Capitalized interest .3030Revaluation of property, plant, and equipment.56Stockholders' equity under local GAAP15,93014,786Description of Accounting DifferencesGoodwill. SKD capitalizes goodwill and amortizes it over a 20-year period. Goodwill is also treated as an asset in Country A and Country B.However, goodwill is not amortized in Country A, but instead is subjected to an annual impairment test. Goodwill is amortized over a 5-yearperiod in Country B.Interest. SKD expenses all interest immediately. In both Country A and Country B, interest related to self-constructed assets must be capitalizedas a part of the cost of the asset.Property, plant, and equipment. SKD carries assets on the balance sheet at their historical cost, less accumulated depreciation. The sametreatment is required in Country A. In Country B, companies in the biotechnology industry generally carry assets on the balance sheet atrevalued amounts. Depreciation is based on the revalued amount of property, plant, and equipment.Step by Step Solution
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