Roonwood Ltd has recently finished building a new item of plant for its own use. The item is a press for use in the manufacture of industrial diamonds. Roonwood Ltd commenced construction of the asset on 1st April 20X2 and completed it on 1st April 20X4.
1st January 20X2, Roonwood Ltd took out a loan to finance the construction of the asset. Interest is charged on the loan at the rate of 5% per annum. The annual interest must be paid in four equal instalments at the end of each quarter. Roonwood Ltd capitalises interest on manufactured assets in accordance with the rules in IAS 23 Borrowing Costs.
The costs (excluding finance costs) of manufacturing the asset were GH¢28 million.
Required
(a). State the IAS 23 requirements on the capitalisation of borrowing costs, calculate the cost of the asset on initial recognition and explain the amount of borrowing cost capitalised.
(b). The press comprises two significant parts, the hydraulic system and the ‘frame.’ The hydraulic system has a three year life and the ‘frame’ has an eight year life. Roonwood Ltd depreciates plant on a straight line basis. The cost of the hydraulic system is 30% of the total cost of manufacture.
Roonwood Ltd uses the IAS 16 revaluation model in accounting for diamond presses and revalues these assets on an annual basis.
Revaluation surpluses or deficits are apportioned between the hydraulic system and the ‘frame’ on the basis of their year-end book values before the revaluation.
Required
Explain the IAS 16 requirements on accounting for significant parts of property, plant and equipment and show the accounting treatment of the diamond press in the financial statements for the financial years ending:
(i) 31st March 20X5 (assume that the press has a fair value of GH¢21 million)
(ii) 31st March 20X6 (assume that the press has a fair value of GH¢19.6 million).
Vantage Ltd owns several properties and has a year end of 31 December. Wherever possible, Vantage Ltd carries investment properties under the fair value model.
Property 1 was acquired on 1 January Year 1. It had a cost of GHC1 million, comprising GHC500,000 for land and GHC500,000 for buildings. The buildings have a useful life of 40 years. Vantage Ltd uses this property as its head office.
Property 2 was acquired many years ago for GHC1.5 million for its investment potential. On 31 December Year 7 it had a fair value of GHC2.3 million. By 31 December Year 8 its fair value had risen to GHC2.7 million. This property has a useful life of 40 years.
Property 3 was acquired on 30 June Year 2 for GHC2 million for its investment potential. The directors believe that the fair value of this property was GHC3 million on 31 December Year 7 and GHC3.5 million on 31 December Year 8. However, due to the specialised nature of this property, these figures cannot be corroborated. This property has a useful life of 50 years.
Required
(a) For each of the above properties briefly state how it would be treated in the financial statements of Vantage Ltd for the year ended 31 December Year 8, identifying any impact on profit or loss.
(b) Produce an analysis of property, plant and equipment for Vantage Ltd for the year ended 31 December Year 8, showing each of the above properties separately.
(a) On July 1, 20X2, Accra Logistics Limited acquired a machine at a cost of GH¢10 million. The useful life of the machine and its salvage value was estimated at 5 years and GH¢3.0 million, respectively. The cost of machine is being depreciated under the straight line method.
Based on the practice followed by similar types of companies, the company has determined that the remaining useful economic life of the machine is six years. It has also been established that the residual value at the end of the useful life will be equal to 10% of the cost of machine.
Required
Compute the depreciation expenses and other adjustments (if any) required to be made in the financial statements of the company for the year ended June 30, 20X4 under the following assumption:
(i) the review of useful life and residual value was carried out on June 30, 20X4.
(ii) the review of useful life and residual value was carried out on June 30, 20X3 but in the financial statements for the year then ended the depreciation expense was erroneously recorded on the previous basis.
(b) Discuss the requirements of International Accounting Standard(s) in respect of estimation and revision of useful life of an item of property, plant and equipment.
FAMCO LTD
FAMCO LTD had the following tangible non-current assets at 31 December 20X3.
Cost
Depreciation
Carrying amount
GH¢000
GH¢000
GH¢000
Land
500
–
500
Buildings
400
80
320
Plant and machinery
1,613
458
1,155
Fixtures and fittings
390
140
250
Assets under construction
91
–
91
2,994
678
2,316
In the year ended 31 December 20X4 the following transactions occur.
(1) Further costs of GH¢53,000 are incurred on buildings being constructed by the company. A building costing GH¢100,000 is completed during the year.
(2) A deposit of GH¢20,000 is paid for a new computer system which is undelivered at the year end.
(3) Additions to plant are GH¢154,000.
(4) Additions to fixtures, excluding the deposit on the new computer system, are GH¢40,000.
(5) The following assets are sold.
Cost
Depreciation b/f
Proceeds
GH¢000
GH¢000
GH¢000
Plant
277
195
86
Fixtures
41
31
2
(6) Land and buildings were revalued at 1 January 20X4 to GH¢1,500,000, of which land is worth GH¢900,000. The revaluation was performed by Messrs Jackson & Co, Chartered Surveyors, on the basis of existing use value on the open market.
(7) The useful economic life of the buildings is unchanged. The buildings were purchased ten years before the revaluation.
(8) Depreciation is provided on all assets in use at the year end at the following rates.
Buildings 2% per annum straight line
Plant 20% per annum straight line
Fixtures 25% per annum reducing balance
Required
Show the disclosure under IAS 16 in relation to non-current assets in the notes to the published accounts for the year ended 31 December 20X4.
Moderna Solutions Limited has carried out a review of its non-current assets.
(a) A lathe was purchased 6 years ago for GH¢150,000. The plant had an estimated useful life of twelve years and a residual value of zero. Depreciation is charged on the straight line basis. On 1 January 20X4, when the asset’s carrying amount is GH¢75,000, the directors decide that the asset’s total useful life is only ten years.
Required:
Explain the effects of these changes on the depreciation for the year to 31 December 20X4.
(b) A grinder was purchased on 1 January 20X1 for GH¢100,000. The plant had an estimated useful life of ten years and a residual value of zero. Depreciation is charged on the straight line basis. On 1 January 20X4, when the asset’s carrying amount is GH¢70,000, the directors decide that it would be more appropriate to depreciate this asset using the sum of digits approach. The remaining useful life is unchanged.
Required:
Explain the effects of these changes on the depreciation for the year to 31 December 20X4.
(c) The company purchased a property some years ago for GH¢1,000,000. This was being depreciated over its life on a straight line basis. On 1 January 20X4, when the carrying amount is GH¢480,000 and twenty-four years of the useful life are remaining, the property is revalued to GH¢1,500,000. This revised value is being incorporated into the accounts.
Required:
Explain the effects of these changes on the depreciation for the year to 31 December 20X4.
The following is an extract from the financial statements of Crest Ltd on 31 December 20X3.
Property, plant and equipment
Land and buildings GH₵
Plant and equipment GH₵
Computer equipment GH₵
Total GH₵
Cost
On 31 December 20X3
1,500,000
340,500
617,800
2,458,300
Accumulated depreciation
On 31 December 20X3
600,000
125,900
505,800
1,231,700
Carrying amount
On 31 December 20X3
900,000
214,600
112,000
1,226,600
Accounting policies Depreciation
Depreciation is provided at the following rates.
On land and buildings: 2% per annum straight line on buildings only
On plant and equipment: 25% reducing balance
On computers: 33.33% per annum straight line
During 20X4 the following transactions took place.
(1) On 31 December the land and buildings were revalued to GH₵1,750,000. Of this amount, GH₵650,000 related to the land (which had originally cost GH₵500,000). The remaining useful life of the buildings was assessed as 40 years.
(2) A machine which had cost GH₵80,000 and had accumulated depreciation of GH₵57,000 at the start of the year was sold for GH₵25,000 in the first week of the year.
(3) A new machine was purchased on 31 March 20X4. The following costs were incurred:
Purchase price, before discount, inclusive of reclaimable sales tax of GH₵3,000: 20,000
Discount: 1,000
Delivery costs: 500
Installation costs: 750
Interest on loan taken out to finance the purchase: 300
(4) On 1 January it was decided to change the method of providing depreciation on computer equipment from the existing method to 40% reducing balance.
Required
Produce the analysis of property, plant and equipment as it would appear in the notes to the financial statements of Crest Ltd for the year ended 31 December 20X4.
The following information relates to the financial statements of Accra Enterprises Limited for the year to 31 March 20X4.
The head office of Accra Enterprises Limited was acquired on 1 April 20X1 for GH¢1million. Accra Enterprises Limited intend to occupy the building for 25 years. On 31 March 20X3 it was revalued to GH¢1.15 million. On 31 March 20X4, a surplus of vacant commercial property in the area had led to a fall in property prices and the fair value was now only GH¢0.8 million.
Required
Explain the correct accounting treatment for the above (with calculations if appropriate).
1 A company purchased some heavy machinery. The invoice for the machinery showed the following items:
GH₵000
Cost of machinery
46,000
Cost of delivery
900
Cost of 12-month warranty on the machinery
1,600
Total amount payable
48,500
In addition, the company incurred GH₵3.4 million in making modifications to its factory so that the heavy machinery could be installed.
What should be the cost of the machinery in the company’s machinery account in the ledger?
2 A business acquired new premises at a cost of GH₵400 million on 1 January 20X5. In the period to the year end of 31 March 20X5 the following further costs were incurred.
GH₵000
Costs of initial adaptation of the building
12,000
Legal costs relating to the purchase
2,500
Monthly cleaning contract
3,400
Cost of air conditioning unit necessary for machinery to be used
2,800
Cost of machinery
12,300
What amount should appear as the cost of premises in the company’s statement of financial position at 31 March 20X5?
3 The plant and machinery account for a company for the year ended 30 June 20X5 is as follows.
Plant and machinery account
20X4
GH₵000
GH₵000
1 July
Balance
960,000
31 March
Transfer to disposal account
31 Dec
Cash: purchase of machines
200,000
30 June
Balance
1,160,000
The company’s policy is to charge depreciation on plant and machinery at 25% each year on the straight-line basis, with proportionate charges in the year of acquisition and the year of disposal. None of the assets held at 1 July 20X4 was more than three years old.
What is the charge for depreciation of plant and machinery for the year ended 30 June 20X5?
4 A motor car was purchased in May 20X2 for GH₵7.8 million. The accounting policy is depreciation at 20% straight line on the cost of the assets in use at the year end. The car was traded in for a replacement vehicle purchased in July 20X5 with the agreed part exchange value being GH₵2.4 million. The company’s year-end is 31 December.
What was the profit or loss on disposal?
5 A business purchased some land and buildings on 1 January 20X1 for GH₵800 million (land GH₵250 million and buildings GH₵550 million). The buildings are to be depreciated over a period of 50 years.
On 1 January 20X5 the land and buildings were revalued to GH₵1,500 million (land GH₵400 million and buildings GH₵1,100 million). At this date the buildings were believed to have a remaining useful life of 40 years.
What is the original depreciation charge for the buildings and the revised charge from 1 January 20X5?
6 A business purchased land for GH₵250 million and buildings for GH₵400 million on 1 January 20X1. The buildings were to be depreciated over a period of 50 years. On 1 January 20X5 the land was revalued to GH₵520 million and the buildings were revalued at GH₵750 million.
What amount is to be taken to the revaluation reserve on 1 January 20X5?
To comply with copyright requirements while preserving the educational value of the questions and answers, the following subtle changes were made to names of individuals, companies, and locations in Question 20:
Company Name Changes:
“Teshie Trading Corporation” was changed to “Teshi Trading Limited”.
“TTC” (abbreviation for Teshie Trading Corporation) was changed to “TTL” (abbreviation for Teshi Trading Limited).
Location Changes:
No specific location names were altered in Question 20, as the original question did not reference specific geographic locations beyond the context of Ghana, which was retained as it aligns with the Institute of Chartered Accountants, Ghana.
Individual Name Changes:
No individual names were present in Question 20, so no changes were made in this regard.
Currency and Context:
The currency “GH₵” and all numerical values were retained exactly as in the original to maintain the integrity of the financial calculations.
The context, structure, and intent of the question and answer were preserved, with only the company name altered to avoid direct replication.
These changes ensure the question and answer remain educationally equivalent while addressing copyright concerns. The tables, financial data, and all other content were reproduced exactly as in the original attachment, except for the noted name changes.
Question Structure
====================================================================== Question Title: FR – L2 – Q20a – Inventories Level: Level 2 Professional Bodies: Institute of Chartered Accountants, Ghana (ICAG) Programs: Professional Program Subjects: Financial Reporting Topics: Financial Reporting Standards and Their Applications Total Marks: 9 Question Tags: Inventories, FIFO, Weighted Average Cost, Cost of Sales, Inventory Valuation, IAS 2 Question Short Summary: Compute cost of sales and inventory for Teshi Trading Limited using FIFO and weighted average cost methods for January 20X6.
Question:
(a) On 1 January 20X6, Teshi Trading Limited held 300 units of an item of finished goods inventory. These were valued at GH₵22 each. During January 20X6, the batches of finished goods were received into store from the production department, as follows:
Date
Units Received
Production cost per unit
10-Jan
400
GH₵23
20-Jan
400
GH₵25
25-Jan
400
GH₵26
Goods sold out of the inventory during January 20X6 were as follows:
Date
Units sold
Sale price per unit
14-Jan
500
GH₵31
21-Jan
500
GH₵33
28-Jan
100
GH₵32
Required
Compute the cost of sales and inventory at 31 January 20X6, applying the following basis of inventory valuation:
(i) FIFO
(ii) Weighted Average Cost (Average is updated after every transaction).
(b) The cost of inventory of Teshi Trading Limited (TTL) based on inventory count conducted on 17 January 20X6 was GH₵675,000. These included goods costing GH₵15,000 which were purchased in December 20X5 and have a net realisable value of GH₵12,000.
During the period between 31 December 20X5 and 17 January 20X6, the following transactions took place:
(i) Value of goods purchased amounted to GH₵155,710.
(ii) Sale of goods amounted to GH₵250,000. TTL normally sells goods at a mark-up of 25% of cost. However, 20% of the sales were made at a discount of 8% of the normal selling price.
(iii) Goods costing GH₵1,990 were returned to a supplier.
(iv) Goods sold to a customer on 4 January 20X6 were returned on 15 January 20X6.
Required
Calculate the value of inventories that should be reported in the financial statements of TTL as at 31 December 20X5.
(c) Which of the following items may be included in computing the value of inventory of finished goods manufactured by a business:
(i) raw materials
(ii) foremen’s salaries
(iii) carriage inwards
(iv) carriage outwards
(v) plant depreciation
(vi) cost of storage of finished goods
(vii) abnormal waste of materials
(viii) salesmen’s commission
(d) What will be the effect of the following on cost of sales, profit, and inventory:
(i) if in times of rising prices, the valuation of inventory is done on the basis of FIFO as opposed to weighted average cost method?
(ii) if an item of inventory having cost of GH₵69,300 and net realisable value of GH₵65,000 is omitted from original inventory count?
Kintampo Limited produces a single product. On July 31, 20X5, the finished goods inventory consisted of 4,000 units valued at GH₵220 per unit and the inventory of raw materials was worth GH₵540,000. For the month of August 20X5, the books of account show the following:
Raw material purchases
GH₵1,250,000
Direct labour
GH₵350,000
Selling costs
GH₵150,000
Depreciation on plant and machinery
GH₵100,000
Distribution costs
GH₵120,000
Factory manager’s salary
GH₵80,000
Indirect labour
GH₵60,000
Indirect material consumed
GH₵40,000
Other production overheads
GH₵90,000
Other accounting costs
GH₵200,000
Other administration overheads
GH₵180,000
Other information:
(i) 8,000 units of finished goods were produced during August 20X5.
(ii) The value of raw materials on August 31, 20X5 amounted to GH₵600,000.
(iii) There was no work-in-progress at the start of the month. However, on August 31, the value of work-in-progress is approximately GH₵250,000.
(iv) 5,000 units of finished goods were available in inventory as on August 31, 20X5.
Required:
Compute the value of closing inventory of finished goods as on August 31, 20X5 based on weighted average cost method.
