Under IFRS the debt issuance costs reduce the fair value of the liability The

# Under ifrs the debt issuance costs reduce the fair

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Under IFRS, the debt issuance costs reduce the fair value of the liability. The fair value of the bonds payable at the date of issuance is \$9,500,000 (\$10,000,000- \$500,000). The entry to initially recognize the liability is: Jan 1, Year 2014 Dr: Cash ............................ 9,500,000 Cr: Bond payable ............... 9,500,000 Subsequent to initial recognition, the bonds payable are measured at amortized cost. Actually, we should use the effective interest rate to calculate as the internal rate of return. But there is no the effective interest rate. So, we assume 9% is the effective interest rate. The following journal entries are made over the life of the bonds: December 31, Year 2014 Dr: Interest Expense (\$9,500,000 *9%) ..................... 855,000 Cr: Cash (\$10,000,000*5%) ........................................ 500,000 Cr: Bonds payable ....................................................... 355,000 December 31, Year 2015 Dr: Interest Expense (9,855,000*9%) ........................... 886,950 Cr: Cash ......................................................................... 500,000

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8 Cr: Bond payable ............................................................ 386,950 December 31, Year 2016 Dr: Interest Expense (10,241,950*9%) ............................ 921,775.5 Cr: Cash ............................................................................ 500,000 Cr: Bonds payable ............................................................. 421,775.5 December 31, Year 2017 Dr: Interest Expense (10,662,725.5*9%) ........................ 959,645.3 Cr: Cash ............................................................................. 500,000 Cr: Bonds payable ............................................................. 459,645,3 December 31, Year 2018 Dr: Interest Expense (11,1122,370.3 *9%) ....................... 1,001,013.3 Cr: Cash ............................................................................... 500,000 Cr: Bonds payable ............................................................... 501,013.3 Under U.S. GAAP, debt issuance costs are deferred as an asset and amortized on a straight-line basis over the life of the debt. Total expense in Year 2014, 2015, 2016,2017, and 2018 would be determined as follows: Interest expense (\$10,000,000 * 5%) ..................................... 500,000 Amortization of debt issuance costs (500,000/5) .................... 100,000 Total .......................................................................................... 600,000 Reconciliation Schedule S.A. Harrington Company
9 Reconciliation from U.S. GAAP to IFRS The following is a summary of the material adjustments to net income and shareholders’ equity, which would have been required if IFRS had been applied instead of U.S. GAAP (amounts in millions of Crowns). Differences in Net Income Years Ended December 31 Note Year 2015 Net Income under U.S. GAAP 5,000 Restructuring costs 1 300 Past service cost 2 (4) Interest Expense 5 386.95 Amortization of deferred charges 5 (100) Net Income under IFRS 5,582.95 Differences in Stockholders’ Equity December 31 Note Year 2015 Stockholders’ equity under U.S. GAAP 40,000 Restructuring costs 1 (300) Past service cost 2 (4) Bond payable 5 (386.95)

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10 Reference 1. Henry, E., Lin, S., & Yang, Y. W. (2009). The European-US “GAAP Gap”: IFRS to US GAAP Form 20-F Reconciliations. Accounting Horizons , 23 (2), 121-150. 2. Gray, S. J., Linthicum, C. L., & Street, D. L. (2009). Have ‘European’and US GAAP measures of income and equity converged under IFRS? Evidence from European companies listed in the US. Accounting and Business Research , 39 (5), 431-447. 3. Van Tendeloo, B., & Vanstraelen, A. (2005). Earnings management under German GAAP versus IFRS. European Accounting Review , 14 (1), 155-180. 4. Gordon, E., Jorgensen, B., & Linthicum, C. (2008). Could IFRS replace US GAAP? A comparison of earnings attributes and informativeness in the US market. Manuscript, Temple University .
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• Fall '14
• Generally Accepted Accounting Principles

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