Question

Addison Company acquires a frontloader for $500,000. The useful life of the frontloader is 10 years. The treads with a value of $50,000 will need to be replaced every five years. The blade has a value of $20,000 and needs to be replaced every two years. At the end of year one what would be the minimum difference in depreciation expense using IFRS and the normal practice followed in US GAAP?

a. None of the above.

b. The depreciation expense would be higher using US GAAP by $13,000

c. Using a composite life of 10 years there would be no difference. Depreciation expense would be $50,000 using both US GAAP and IFRS.

d. The depreciation would be higher using IFRS by $13,000.

e. Based on conservatism the frontloader would be depreciated over 2 years for IFRS and 10 years for US GAAP. Thus, the difference would be $200,000.

Answer 1

Answer:- d. The depreciation would be higher using IFRS by $13,000.

Reason:-  Treads and Blade are componenets of frontloader with different pattern of benefit when compared to front loader pattern of benefit. Under IFRS, Component depreciation is required, whereas under US GAAP component depreciation is not allowed.

So, with the above requirements lets compute depreciation under both methods.

IFRS

Depreciation on Treads - $50,000 / 5 years = $10,000

Dpreciation of Blade = $20,000 / 2 years = $10,000

Depreciation of remaining front loader = $430,000 / 10 years = $43,000

Total depreciation under IFRS = $63,000

US GAAP

Depreciation of front loader = $500,000 / 10 years = $50,000

Total depreciation under IFRS = $50,000

Difference = $13,000 (higher under US GAAP)