SKD Limited is a biotechnology company that prepares financial statements using internally developed accounting rules (referred to as SKD GAAP). To be able to compare SKD's financial statements with those of companies in their home country, financial analysts in Country A and Country B prepared a reconciliation of SKD's current year net income and stockholders' equity Adjustments were based on the actual accounting policies and practices followed by biotechnology companies in Country A and Country B. The following table shows the adjustments to income and stockholders' equity made by each country analyst:

Required:
1. With respect to the adjustments related to goodwill, answer the following:
a. Why does the adjustment for goodwill amortization increase net income under Country A GAAP but decrease net income under Country B GAAP?
b. Why does the goodwill adjustment increase stockholders' equity in Country A but decrease stockholders' equity in Country B?
c. Why are the adjustments to stockholders' equity larger than the adjustments to income?
2. With respect to the adjustments made by the analyst in Country A related to interest, answer the following:
a. Why are there two separate adjustments to income related to interest?
b. Why does the adjustment to income for capitalized interest increase income, whereas the adjustment for depreciation related to capitalized interest decreases income?
c. Why is the positive adjustment to stockholders' equity for capitalized interest smaller than the positive adjustment to income for capitalized interest?
3. With respect to the adjustments made by the analyst in Country B related to fixed assets, answer the following:
a. Why does the adjustment for depreciation related to revalued fixed assets decrease income, whereas the adjustment for revaluation of fixed assets increases stockholders' equity?

Transcribed Image Text:

Country Country B Income under SKD GAAP 1,050 1,050 Adjustments Goodwill amortization Capitalized interest Depreciation related to capitalized interest. (20) Depreciation related to revalued tixed assets. (100) 50 (20) 300 50 1.380 972 Income under local GAAP Stockholders' equity under SKD GAAP Adjustments 1 5,000 15.000 Goodwill Capitalized interest Revaluation of fixed assets (300) 30 56 14,786 900 30 Stockholders' equity under local GAAP 15,930