SKD Limited Â Case Solution
- Why does the adjustment for goodwill amortization increase net income under Country A GAAP but decrease net income under Country B GAAP?
There is no expense for the amortization of the goodwill of SKD Limited as per the accounting rules and practices of Country A. The adjustment for the goodwill amortization expense has been made in the favor of SKD Limited and that is Country A should be added back in the goodwill of SKD limited.
SKD limited has an amortization period of more than 20 years for the goodwill of the company. However, Country B has restricted the amortization period to 5 years for the goodwill. The decrease in the amortization period of the goodwill identified by the company would increase the expense of the goodwill amortization, which in return, would decrease the net income of SKD Limited under Country Bâ€™s GAAP.
- Why does the goodwill adjustment increase stockholders’ equity in Country A but decrease stockholders’ equity in Country B?
Goodwill is the main factor assigned to the Shareholders. Moreover, goodwill does not directly affect the shareholdersâ€™ equity as it cannot be linked to the retained earnings and distributed among the shareholders. However, it can be used as the shareholdersâ€™ equity at the time of valuation or when selling the company. This indicates that the adjustments made in the goodwill will affect the stockholdersâ€™ equity and its retained earnings.
The increase in the net income of SKD limited under Country A would lead to an increase in the retain earnings of the company which will increase the shareholdersâ€™ equity. Similarly, the decrease in the net income under the country Bâ€™s GAAP will decrease the retained earnings, which would decline the shareholdersâ€™ equity under Country Bâ€™s GAAP.
The value of the adjustments in the shareholdersâ€™ equity is greater than the value of the adjustments made in the income statement due to the value of the goodwill. The adjustments in the income statement are completely made on the basis of the fiscal year data.Â However, the entries in the balance sheet and shareholdersâ€™ equity are considered as from the time of the origin of the company.
The goodwill in the shareholdersâ€™ equity is 900 as compared to 300 in the income statement, which is assumed as 3 times the goodwill in the net income. With the cumulative value of the goodwill, the adjustments to the shareholdersâ€™ equity are greater than the adjustments made in the income statement.
- Why are there two separate adjustments to income related to interest?
The two adjustments made for the interest in the income include capitalized interest and depreciation related to capitalized interest. Moreover, the Capitalized Interest is not considered as an expense under Country Aâ€™s GAAP and Country Bâ€™s GAAP. The value for the capitalized interest is 50 for both the Country A and Country B. However, the depreciation related to the capitalized interest is contributed as a cost of the specific asset under the Country A and Country Bâ€™s GAAP. Moreover, its value is calculated as 20 for both the countries.
The adjustments under Country A and Country Bâ€™s GAAP are similar.. The adjustments for the Capitalized interest has increased the income as the entry is not being considered as an expense, whereas the entry or adjustment for the depreciation related to capitalized interest has been termed as an expense, which is the cost of the specific asset which declines the income………………
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