PROBLEM: ACCOUNTING FOR INFLATION

Problem 1
Sorocaba company is located in a highly inflationary country and in accordance with IAS 29 prepares
financial statement on a general purchasing power (inflation-adjusted) basis through reference to changes
in the general price index (!I)" #he company had the following transactions in$ol$ing machinery and
e%uipment in its first two years of operations&
'ate #ransaction (ost )seful *ife !I
+anuary ,-. /ear ,
0arch 21. /ear ,
2ctober ,1. /ear ,
'ecember 3,. /ear ,
+anuary 4. /ear 2
'ecember 3,. /ear 2
!urchase 0achine 5
!urchase 0achine /
!urchase 0achine 6
Sold 0achine 5
721.111
--.111
,31.111
4 years
- years
,1 years
,11
,,1
,31
,41
,81
,91

Required:
'etermine the amount that would be reported as machinery and e%uipment in accordance with IAS 29 on
'ecember 3,. /ear , and 'ecember 3,. /ear 2. balance sheets"
Solution:
Soro!b! Com"!n#
$eember %1& 'e!r 1
Original Restated
Purchase Historical Restatement Historical
Date Item Cost Ratio Cost
,:,-:/, 0achine 5 7 21.111 ,41:,11 7 29.111
3:21:/, 0achine / --.111 ,41:,,1 ;1.111
,1:,1:/, 0achine 6 ,31.111 ,41:,31 ,41.111
721-.111 7239.111
$eember %1& 'e!r (
Original Restated
Purchase Historical Restatement Historical
Date Item Cost Ratio Cost
3:21:/, 0achine / 7 --.111 ,91:,,1 7 91.111
,1:,1:/, 0achine 6 ,31.111 ,91:,31 ,91.111
7,9-.111 72;1.111
Alternati$ely. the restated historical cost at 'ecember 3,. /ear 2 could be determined as follows&
$eember %1& 'e!r (
Restated Restated
Historical Historical
Purchase Cost Restatement Cost
Date Item (12/31/Y1) Ratio (12/31/Y2)
3:21:/, 0achine / 7 ;1.111 ,91:,41 7 91.111
,1:,1:/, 0achine 6 ,41.111 ,91:,41 ,91.111
72,1.111 72;1.111
Ignoring depreciation. machinery and e%uipment would be reported on the balance sheet at&
,2:3,:/, 7239.111
,2:3,:/2 72;1.111
1
Problem (
'oner (ompany Inc" begins operations 1n +anuary ,. /ear ," #he company<s unadjusted financial
statements for the year ended 'ecember 3,./ear ,. appear as follows&
B!l!ne )*eet) 1+1+'1 1(+%1+'1
(ash and recei$able======
!lant > ?%uipment. net====""
#otal =="""========"
!ayables ==========""
(ontributed capital ======"
@etained earnings ======""
#otal =="""========"
721.111
-1.111
7;1.111
7,-.111
--.111
" - "
7;1.111
73-.111
4-.111
791.111
7,-.111
--.111
,1.111
791.111
Inome )t!tement& 'e!r 1
@e$enues =========="
'epreciation expense =====
2ther expenses =======""
Income ===========""
7-1.111
(-.111)
(3-.111)
7,1.111
@e$enues and expenses occur e$enly through the yearA re$enues and other expenses are realiBed in
terms of monetary assets (cash and recei$ables)
eneral price indexes for /ear , are as follows&
,:,:/, =========
A$erage /, ======""
,2:3,:/, ========
,11
,21
,-1
In)trution)
a" (alculate 'oner (ompany<s /ear , purchasing power gain or loss on net
monetary items
b" 'etermine 'oner (ompany<s /ear , income on a general purchasing power
basis (ignore income taxes)
Soulution :
$oner Com"!n#
(alculation of !urchasing !ower *oss
Cet monetary assets. ,:,:/, 7-.111 x ,-1:,11 D 7 ;.-11
!lus& Increase in net monetary assets ,-.111 x ,-1:,21 D ,9.;-1
Cet monetary assts. ,2:3,:/, 721.111 728.2-1
21.111
!urchasing power loss 7 8.2-1
!! Income Statement
/ear ,
@e$enues 7-1.111 x ,-1:,21 D 7 82.-11
'epreciation (-.111) x ,-1:,11 D (;.-11)
2ther expenses (incl" income taxes) (3-.111) x ,-1:,21 D (43.;-1)
!urchasing power loss (8.2-1)
Cet income 7 -.111
ood *ucE
2