Reference no: EM132796016

Brazel Corp is a U.S. based company that prepares its financial statements in accordance with U.S. GAAP. The company reported income in 2015 of $1 000 000 and shareholders' equity as at 31 December 2015 of $8 000 000.

The CEO of Brazel Corp has learned that the regulators in the U.S. may require U.S. companies to prepare their financial statements using International Financial Reporting Standards (IFRS) in future. The company intends to determine the impact that the switch to IFRS will have on its financial statements.

Differences have been identified in the following areas of financial reporting between U.S. GAAP and IFRS:

1. At year-end 2015, the cost of inventories of Brazel Corp are assigned by using the last-in, first-out (LIFO) cost formula. The cost of inventories using LIFO is $250 000. To apply IFRS, in accordance with IAS 2, Brazel Corp have to use the first-in, first-out (FIFO) cost formula to value its inventories. The cost of inventories using FIFO is $190 000.

2. The company acquired a building on 25 December 2015 at a cost of $2 750 000. The building has an estimated useful life of 25 years, residual value of $250 000, and is being depreciated on a straight-line basis. The building has been appraised and determined to have a fair value of $3 250 000. In its switch to IFRS the company will use the revaluation model to determine the value of its property, plant and equipment.

3. IFRS requires financial assets such as short-term investments to be measured at market value. As part of a business combination in 2015, the company acquired share investment with a fair value of $40 000. At the year-end 2015, the share investment is determined to have a fair value of $35 000. The share investment is held for short-term profit-making purposes.

4. Brazel Corp's management is conservative in its accounting values and decided to make a provision of $50 000 for any future natural disaster that may occur. However, at 31 December 2015 there was no contractual obligation to incur any expenditure due to natural disasters. Hence, this provision for natural disaster cannot be recognised.

5. Brazel Corp had recognised $175 000 research and development expense in 2015. $50 000 of these costs satisfies the IFRS criteria to carry forward (i.e. can be recognised as an intangible asset).

Required:

Problem a) Prepare the necessary General Journal entries (Dr/Cr) to adjust the books of Brazel Corp to reflect the requirements of IFRS as at 31 December 2015. Narrations are not required.

Problem b) Calculate the revised net profit before income tax for the year ended 31 December 2015.