Question

P2.3 Transactions from Gravenhurst Inc.'s current year follow. Gravenhurst follows IFRS. 1. Gravenhurst Inc. thinks it should dispose of its excess land. While the carrying value is $50,000, current market prices are depressed and only $25,000 is expected upon disposal. The following journal entry was made: Loss on Disposal of Land 25,000 Land 25,000 2. Merchandise inventory that cost $630,000 was reported on the statement of financial position at $690,000, which is the expected selling price less estimated selling costs. The following entry was made to record this increase in value: Inventory 60,000 Sales Revenue 60,000 3. The company is being sued for $500,000 by a customer who claims damages for personal injury that was allegedly caused by a defective product. Company lawyers feel extremely confident that the company will have no liability for damages resulting from the situation. Nevertheless, the company decides to make the following entry: Litigation Expense 450,000 Litigation Liability 450,000 4. Because the general level of prices increased during the current year, Gravenhurst Inc. determined that there was a $15,000 understatement of depreciation expense on its equipment and decided to record it in its accounts. The following entry was made: Depreciation Expense 15,000 Accumulated Depreciation Equipment 15,000 5. Gravenhurst Inc. has been concerned about whether intangible assets could generate cash in case of liquidation. As a result, goodwill arising from a business acquisition during the current year and recorded at $800,000 was written off as follows: Retained Earnings 800,000 Goodwill 800,000 6. Because of a "fire sale," equipment that was obviously worth $200,000 was acquired at a bargain price of $155,000. The following entry was made: Equipment 200,000

Answer 1

1. In the first case, Gravenhurst Inc. decides to dispose of the excess land. Since current market price is less than the carrying value, it reduces the value of an asset that is Land which should be credited. And as per principles of accounting, any loss incurred should be debited. Therefore the given journal entry is correct.

2. Since there is a gain of $60,000 in the cost of inventory, as per the principles of accounting, any gain whether realised or unrealised has to be credited. And since there is no sale of inventory, it cannot be credited with sales revenue.

3. The above journal entry has to be recorded in the books only if the likelihood of occurrence is high. In case if the likelihood of occurrence is low or nil, then it has to disclosed in the footnotes of financial statements.

4. Since, depreciation expense is understated by $15,000, depreciation account has to be debited with the understated amount and accumulated depreciation account has to be credited as accumulated depreciation account is contrary to the depreciation account. Therefore given journal entry is correct.

5. Under write off method, goodwill is immediately written off against retained earnings. Therefore the given journal entry is appropriate.

6. Since there is an incoming of asset, Asset account has to be debited with the full cost that is $200,000. Since the asset is acquired at a price less than the original price, actual amount paid should be credited and since it has been acquired at less price, the difference amount is to be treated as discount received.