- 5 Marks
Question
Lana Ltd is a public listed company in Ghana, located in the Northern Region. The company operates in the manufacturing sector and prepares its accounts to 31 December each year. During the year ended 31 December 2021, Lana Ltd built a head office. The costs associated with the construction of the head office are as follows:
| GH¢ million | |
|---|---|
| Fees for environmental certifications and building permits | 0.5 |
| Leasehold Land acquisition | 10.0 |
| Architect and engineer fees | 1.0 |
| Construction material and labor costs (including unused materials) | 6.5 |
At 31 October 2021, when the head office extension became available for use, the cost of unused materials on site amounted to GH¢0.5 million. The total borrowing costs incurred on a loan specifically used to finance the head office extension amounted to GH¢0.8 million. The estimated useful life of the building was 40 years.
Required:
With reference to IFRSs, determine:
i) The initial cost to be capitalized.
ii) The depreciation charge for the year ended 31 December 2021.
iii) The carrying amount as of 31 December 2021.
Answer
The total cost to be capitalized includes:
| GH¢ million | |
|---|---|
| Leasehold land acquisition | 10.0 |
| Fees for environmental certifications and building permits | 0.5 |
| Architect and engineer fees | 1.0 |
| Construction material and labor costs | 6.5 |
| Unused material (deducted) | (0.5) |
| Borrowing costs | 0.8 |
| Total Initial Cost to be Capitalized = GH¢18.3 million |
Depreciation for 2 months:
| Depreciation charge = GH¢18.3 million / 40 years * (2/12) = GH¢0.08 million
Carrying amount as of 31 December 2021:
| Carrying amount = GH¢18.3 million – GH¢0.08 million = GH¢18.22 million
- Tags: Borrowing Costs, Capitalization, Construction, Depreciation, IFRS
- Level: Level 2
- Topic: Preparation of Financial Statements
- Series: MAR 2023
- Uploader: Uploader1