Depreciation – Knowsia

FR – L2 – Q43 – Leases

Show extracts from Zest Pharma Plc's accounts for a 5-year lease with a 2-year extension option, including calculations for 20X4.

Question

Zest Pharma Plc leases an asset on 1 January 20X4.
The lease is for five years at a rental of GH₵600,000 per half year in advance, with an option of two more years at nominal rental. It is reasonably certain that the option will be exercised. The present value of future lease payments is GH₵4,400,000.
The directors of Zest Pharma Plc consider that the asset has a useful life of seven years.
The rate of interest implicit in the lease is 7.68% per half year.

Required
Prepare relevant extracts from the accounts of Zest Pharma Plc at 31 December 20X4.

Answer

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Tags: Depreciation, Finance Costs, Financial Statements, IFRS 16, Lease Liability, Leases, Right-of-Use Asset
Level: Level 2

Topic: Financial Reporting Standards and Their Applications

Title: FR – L2 – Q42 – Leases

Show how a 4-year machine lease is presented in Fablon Ltd’s 20X4 financial statements, including profit or loss and financial position.

Question

Fablon Limited leased a machine on 1 January 20X4 for four years. Lease payments of GH¢40,000 are payable in arrears annually. The interest rate implicit in the lease is 10% and the present value of the minimum lease payments is GH¢126,760.

Required
Show how the lease agreement would be presented in the statement of profit or loss for 20X4 and the statement of financial position at 31 December 20X4. Notes to the financial statements are not required.

Answer

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Tags: Depreciation, Finance Costs, Financial Statements, IFRS 16, Lease Liability, Leases, Right-of-Use Asset
Level: Level 2

Topic: Financial Reporting Standards and Their Applications

FR – L2 – Q41 – Financial Reporting Standards and Their Applications

Show extracts from Cypress Limited's 20X4 financial statements for leases of a threshing and baling machine.

Question

On 1 January 20X4, Cypress Limited entered into the following lease agreements.

(a) Threshing machine
A lease of a threshing machine for 3 years from Alpha Ltd.
A deposit of GH¢2,000,000 was payable on 1 January 20X4 followed by 3 instalments of GH¢6,500,000 payable in arrears, commencing on 31 December 20X4. The present value of future lease payments is GH¢16,752,000 and the interest rate implicit in the lease is 8%.

(b) Baling machine
A lease of a baling machine for 5 years from Beta Ltd.
Cypress Limited has agreed to make 5 annual instalments of GH¢35,000 payable in advance, commencing on 1 January 20X4. The present value of future lease payments is GH¢150,000.
The interest rate implicit in the lease is 8.36%.

Required

Show the relevant extracts from the accounts of Cypress Limited for year ended 31 December 20X4.

Answer

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Tags: Depreciation, Finance Costs, Financial Statements, IFRS 16, Lease Liabilities, Leases, Right-of-Use Assets
Level: Level 2

Topic: Financial Reporting Standards and Their Applications

FR – L2 – Q40 – Financial Reporting Standards and Their Applications

Show lease presentation for a boat lease in Finley Ltd's financial statements for 20X4, including profit or loss and financial position extracts.

Question

On 1 January 20X4, Finley Ltd entered into an agreement to lease a boat. The initial measurement of the lease liability was GH¢36,000 and the term of the lease was four years. Annual lease payments of GH¢10,000 are payable in advance. The interest rate implicit in the lease is 7.5%.

Required
Show how this lease would be presented in the statement of profit or loss of Finley Ltd for the year ended 31 December 20X4 and the statement of financial position as at that date. Detailed disclosure notes are not required.

Answer

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Tags: Depreciation, Finance Costs, Financial Statements, IFRS 16, Interest rate, Lease Accounting, Statement of Financial Position, Statement of profit or loss
Level: Level 2

Topic: Financial Reporting Standards and Their Applications

FR – L2 – Q39 – Leases

Explain accounting for a 5-year machine lease with advance payments under IFRS 16 for Bela Ltd.

Question

The following information relates to the financial statements of Bela Limited for the year to 31 March 20X4.

On 1 October 20X3, Bela Limited entered into a 5 year lease for a machine from Narbona, agreeing to make payments every 6 months of GH¢29,500 beginning on the 1 October 20X3.

The present value of future lease payments at the commencement of the lease and before any payments are made is GH¢250,000 and the machine is believed to have a useful life of 5 years. The six-month interest rate implicit in the lease is 3.9%.

Required

Explain the correct accounting treatment for the above (with calculations where appropriate).

Answer

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Tags: Depreciation, Finance Costs, IFRS 16, Lease Liability, Leases, Right-of-Use Asset
Level: Level 2

Topic: Financial Reporting Standards and Their Applications

FR – L2 – Q35 – Financial Reporting Standards and Their Applications

Explain accounting treatment for revalued properties of Peak Limited, including depreciation and impairment for the year ended 31 March 20X4.

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

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Tags: Depreciation, Financial Statements, IAS 16, Impairment, Non-current Assets, Profit or Loss, Property Valuation, Revaluation, Revaluation Reserve
Level: Level 2

Topic: Financial Reporting Standards and Their Applications

FR – L2 – Q34 – Impairment of Assets

Calculate the impact of impairment, revaluation, and sale of three machines on profit or loss, OCI, and revaluation reserve for Chantelle (Ghana) Ltd in Year 7.

Question

The following is relevant to three tangible non-current assets held by Chantelle (Ghana) Ltd.

Machine 1 was purchased on 1 January Year 1 for GH¢420,000. It had an estimated residual value of GH¢50,000 and a useful life of ten years and was being depreciated on a straight-line basis. On 1 January Year 6 Chantelle (Ghana) Ltd revalued this machine to GH¢275,000 and reassessed its total useful life as fifteen years. On 1 January Year 7 an impairment review showed machine 1’s recoverable amount to be GH¢100,000 and its remaining useful life to be five years.

Machine 2 was purchased on 1 January Year 1 for GH¢500,000. It had an estimated residual value of GH¢60,000 and a useful life of ten years and was being depreciated on a straight-line basis. On 1 January Year 7 this machine was classified as held for sale, at which time its fair value was estimated at GH¢200,000 and costs to sell at GH¢5,000. On 31 March Year 7 the machine was sold for GH¢210,000.

Machine 3 was purchased on 1 January Year 1 for GH¢600,000. In Year 1 depreciation of GH¢30,000 was charged. On 1 January Year 2 this machine was revalued to GH¢800,000 and its remaining useful life assessed as eight years. On 1 January Year 7 this machine was classified as held for sale, at which time, its fair value was estimated at GH¢550,000 and costs to sell at GH¢5,000. On 31 March Year 7 the machine was sold for GH¢550,000.

Tax is at the rate of 30%.

Required
For each machine show the effect of the above on profit or loss, other comprehensive income and revaluation reserve of Chantelle (Ghana) Ltd in Year 7. You should also show the brought forward balance on the revaluation reserve (at 1 January Year 7) in respect of machines 1 and 3.

Answer

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Tags: Depreciation, Held for Sale, IAS 36, IFRS 5, Impairment, Non-current Assets, Other Comprehensive Income, Profit or Loss, Revaluation, Revaluation Reserve
Level: Level 2

Topic: Impairment of Assets

FR – L2 – Q29 – Government Grants

Show how Karla Ltd's three grants are reflected in financial statements for year ended 30 June Year 2, with options per IAS 20.

Question

During the year ended 30 June Year 2, Karla Ltd received three grants, the details of which are set out below.
(1) On 1 September, a grant of GH₵40,000 from local government. This grant was in respect of training costs of GH₵70,000 which Karla Ltd had incurred.
(2) On 1 November Karla Ltd bought a machine for GH₵350,000. A grant of GH₵100,000 was received from central government in respect of this purchase. The machine, which has a residual value of GH₵50,000, is depreciated on a straight-line basis over its useful life of five years.
(3) On 1 June, a grant of GH₵100,000 from local government. This grant was in respect of relocation costs that Karla Ltd had incurred moving part of its business from outside the local area. The grant is repayable in full unless Karla Ltd recruits ten employees locally by the end of Year 2. Karla Ltd is finding it difficult to recruit as the local skill base does not match the needs of this part of the business.

Required
Show how the above transactions should be reflected in the financial statements of Karla Ltd for the year ended 30 June Year 2. Where any accounting standards allow a choice you should show all possible options.

Answer

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Tags: Deferred Income, Depreciation, Financial Statements, Government Grants, IAS 20, Relocation Costs, Training Costs
Level: Level 2

Topic: Government Grants

FR – L2 – Q28 – Borrowing Costs

Explain IAS 23 requirements for capitalising borrowing costs and calculate the cost of a manufactured asset for Ramsay Ltd.

Question

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).

Answer

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Tags: Depreciation, Diamond Press, IAS 16, Revaluation, Significant Parts
Level: Level 2

Topic: Financial Reporting Standards and Their Applications

FR – L2 – Q27 – Investment Properties

Explain accounting treatment for Vantage Ltd's properties in financial statements for 31 Dec Year 8, noting profit/loss impact.

Question

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.

Answer

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Tags: Depreciation, Fair Value, Financial Statements, Investment Properties, Plant and equipment, Property
Level: Level 2

Topic: Preparation of Financial Statements

Tag (SQ): Depreciation

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FR – L2 – Q43 – Leases

Show extracts from Zest Pharma Plc's accounts for a 5-year lease with a 2-year extension option, including calculations for 20X4.

Title: FR – L2 – Q42 – Leases

Show how a 4-year machine lease is presented in Fablon Ltd’s 20X4 financial statements, including profit or loss and financial position.

FR – L2 – Q41 – Financial Reporting Standards and Their Applications

Show extracts from Cypress Limited's 20X4 financial statements for leases of a threshing and baling machine.

FR – L2 – Q40 – Financial Reporting Standards and Their Applications

Show lease presentation for a boat lease in Finley Ltd's financial statements for 20X4, including profit or loss and financial position extracts.

FR – L2 – Q39 – Leases

Explain accounting for a 5-year machine lease with advance payments under IFRS 16 for Bela Ltd.

FR – L2 – Q35 – Financial Reporting Standards and Their Applications

Explain accounting treatment for revalued properties of Peak Limited, including depreciation and impairment for the year ended 31 March 20X4.

FR – L2 – Q34 – Impairment of Assets

Calculate the impact of impairment, revaluation, and sale of three machines on profit or loss, OCI, and revaluation reserve for Chantelle (Ghana) Ltd in Year 7.

FR – L2 – Q29 – Government Grants

Show how Karla Ltd's three grants are reflected in financial statements for year ended 30 June Year 2, with options per IAS 20.

FR – L2 – Q28 – Borrowing Costs

Explain IAS 23 requirements for capitalising borrowing costs and calculate the cost of a manufactured asset for Ramsay Ltd.

FR – L2 – Q27 – Investment Properties

Explain accounting treatment for Vantage Ltd's properties in financial statements for 31 Dec Year 8, noting profit/loss impact.

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FR – L2 – Q43 – Leases

Show extracts from Zest Pharma Plc's accounts for a 5-year lease with a 2-year extension option, including calculations for 20X4.

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Title: FR – L2 – Q42 – Leases

Show how a 4-year machine lease is presented in Fablon Ltd’s 20X4 financial statements, including profit or loss and financial position.

You're reporting an error for "Title: FR – L2 – Q42 – Leases"

FR – L2 – Q41 – Financial Reporting Standards and Their Applications

Show extracts from Cypress Limited's 20X4 financial statements for leases of a threshing and baling machine.

You're reporting an error for "FR – L2 – Q41 – Financial Reporting Standards and Their Applications"

FR – L2 – Q40 – Financial Reporting Standards and Their Applications

Show lease presentation for a boat lease in Finley Ltd's financial statements for 20X4, including profit or loss and financial position extracts.

You're reporting an error for "FR – L2 – Q40 – Financial Reporting Standards and Their Applications"

FR – L2 – Q39 – Leases

Explain accounting for a 5-year machine lease with advance payments under IFRS 16 for Bela Ltd.

You're reporting an error for "FR – L2 – Q39 – Leases"

FR – L2 – Q35 – Financial Reporting Standards and Their Applications

Explain accounting treatment for revalued properties of Peak Limited, including depreciation and impairment for the year ended 31 March 20X4.

You're reporting an error for "FR – L2 – Q35 – Financial Reporting Standards and Their Applications"

FR – L2 – Q34 – Impairment of Assets

Calculate the impact of impairment, revaluation, and sale of three machines on profit or loss, OCI, and revaluation reserve for Chantelle (Ghana) Ltd in Year 7.

You're reporting an error for "FR – L2 – Q34 – Impairment of Assets"

FR – L2 – Q29 – Government Grants

Show how Karla Ltd's three grants are reflected in financial statements for year ended 30 June Year 2, with options per IAS 20.

You're reporting an error for "FR – L2 – Q29 – Government Grants"

FR – L2 – Q28 – Borrowing Costs

Explain IAS 23 requirements for capitalising borrowing costs and calculate the cost of a manufactured asset for Ramsay Ltd.

You're reporting an error for "FR – L2 – Q28 – Borrowing Costs"

FR – L2 – Q27 – Investment Properties

Explain accounting treatment for Vantage Ltd's properties in financial statements for 31 Dec Year 8, noting profit/loss impact.

You're reporting an error for "FR – L2 – Q27 – Investment Properties"

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