- 10 Marks
FR – L2 – Q35 – Financial Reporting Standards and Their Applications
Question
Peak Limited conducts its activities from two properties, a main office in the centre and a property in the rural area where staff training is conducted. Both properties were acquired on 1 April 20X1 and had estimated lives of 25 years with no residual value. The company has a policy of carrying its land and buildings at current values. However, until recently property prices had changed for some years. On 1 October 20X3 the properties were revalued by a firm of surveyors. Details of this and the original costs are:
| Land | Main office | Training premises |
|---|---|---|
| Cost 1 April 20X1 | 500 | 300 |
| Valuation 1 October 20X3 | 700 | 350 |
| Buildings | Main office | Training premises |
| Cost 1 April 20X1 | 1,200 | 900 |
| Valuation 1 October 20X3 | 1,350 | 600 |
Required
Show the effect of the above transactions on the statement of profit or loss and statement of financial position of Peak Limited for the year ended 31 March 20X4.
Answer
Peak Limited statement of profit or loss (extracts) – year to 31 March 20X4
Note: workings in brackets are in GH¢’000
| Description | GH¢ |
|---|---|
| Depreciation: main office – 6 months to 1 October 20X3 (1,200/25 × 6/12) | 24,000 |
| – 6 months to 31 March 20X4 (1,350/22.5 × 6/12) | 30,000 |
| Depreciation: training premises – 6 months to 1 October 20X3 (900/25 × 6/12) | 18,000 |
| – 6 months to 31 March 20X4 (600/10 × 6/12) | 30,000 |
| Impairment loss (W2) | 210,000 |
Statement of financial position (extracts) as at 31 March 20X4
| Description | GH¢’000 |
|---|---|
| Non-current assets | |
| Land and buildings – main office (700 + 1,350 – 30) | 2,020 |
| – training premises (350 + 600 – 30) | 920 |
| Revaluation reserve | |
| Main office land (700 – 500) | 200 |
| Building (1,350 – 1,080 (W1)) | 270 |
| Training premises land (350 – 300) | 50 |
| Transfer to realised profit (270/22.5 (W1) × 6/12 re depreciation of buildings) | (6) |
Workings
(W1) The date of the revaluation is two and a half years after acquisition. This means the remaining life of the main office would be 22.5 years. The carrying amount of the main office building at the date of revaluation is GH¢1,080,000 i.e. its cost less two and a half years at GH¢48,000 per annum (GH¢1,200,000 – GH¢120,000).
(W2) Impairment loss: the carrying amount of training premises at date of revaluation is GH¢810,000 i.e. its cost less two and a half years at GH¢36,000 per annum (GH¢900,000 – GH¢90,000). It is revalued down to GH¢600,000 giving a loss of GH¢210,000. As the land and the buildings are treated as separate assets the gain on the land cannot be used to offset the loss on the buildings.
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