Tag (SQ): IAS 16

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  • 12 Marks

FR – L2 – Q47 – Provisions and Contingencies

Advise on accounting for an insurance claim with a debit balance and potential additional payment.

ACCOUNTING TREATMENT
You have been asked to advise on the appropriate accounting treatment for the following situations arising in the books of various companies. The year end in each case can be taken as 31 December 20X4 and you should assume that the amounts involved are material in each case.
(a) At the year-end there was a debit balance in the books of a company for GH¢15,000, representing an estimate of the amount receivable from an insurance company for an accident claim. In February 20X5, before the directors had agreed the final draft of the published accounts, correspondence with lawyers indicated that GH¢18,600 might be payable on certain conditions.
(b) A company has an item of equipment which cost GH¢400,000 in 20W8 and was expected to last for ten years. At the beginning of the 20X4 financial year the book value was GH¢280,000. It is now thought that the company will soon cease to make the product for which the equipment was specifically purchased. Its recoverable amount is only GH¢80,000 at 31 December 20X4.
(c) On 30 November, a company entered into a legal action defending a claim for supplying faulty machinery. The company’s solicitors advise that there is a 20% probability that the claim will succeed. The amount of the claim is GH¢500,000.
(d) An item has been produced at a manufacturing cost of GH¢1,800 against a customer’s order at an agreed price of GH¢2,300. The item was in inventory at the year-end awaiting delivery instructions. In January 20X5 the customer was declared bankrupt and the most reasonable course of action seems to be to make a modification to the unit, costing approximately GH¢300, which is expected to make it marketable with other customers at a price of about GH¢1,900.
(e) At 31 December, a company has a total potential liability of GH¢1,000,400 for warranty work on contracts. Past experience shows that 10% of these costs are likely to be incurred, that 30% may be incurred but that the remaining 60% is highly unlikely to be incurred.

Required
For each of the above situations outline the accounting treatment you would recommend and give the reasoning of principles involved. The accounting treatment should refer to entries in the books and/or the year-end financial statements as appropriate.

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  • 10 Marks

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.

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.

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  • 20 Marks

FR – L2 – Q28 – Borrowing Costs

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

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).

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  • 15 Marks

FR – L2 – Q26 – Property, Plant and Equipment

Calculate depreciation for a machine after revising useful life and residual value on June 30, 20X4.

(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.

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  • 14 Marks

FR – L2 – Q25 – Financial Reporting Standards and Their Applications

Disclose non-current asset movements for FAMCO LTD under IAS 16, including revaluation, depreciation, and disposals for 20X4.

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.

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  • 15 Marks

FR – L2 – Q24 – Property, Plant and Equipment

Explain the effect of revising the useful life of a lathe on depreciation for 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.

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  • 15 Marks

FR – L2 – Q23 – Financial Reporting Standards and Their Applications

Prepare PPE analysis for Crest Ltd for 20X4, including revaluation, disposal, and depreciation method change.

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.

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  • 10 Marks

FR – L2 – Q22 – Property, Plant and Equipment

Explain accounting treatment for revaluation and depreciation of Tema Limited's head office property under IAS 16.

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).

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  • 15 Marks

FA – L1 – Q22 – Non-current assets and depreciation

Prepare Patowato Motors’ vehicle accounts for 20X6-20X9 and explain why revaluing some vehicles is unethical

Patowato Motors Limited leases second-hand German sports cars for special occasions. It started business on 1 January 20X6 and has decided to depreciate the cars on a straight line basis at 25% per annum on cost at the year-end. During the years 20X6 to 20X9 the following purchases and sales of cars took place.

20X6 Acquired 20 Porsche 928 Turbos at a cost of GH₵18.6 million each
20X7 Purchased 6 Porsche vehicles for a total cost of GH₵108.6 million.
20X8 Traded-in two of the cars acquired in 20X6 and received an allowance of GH₵9 million each which was set against the purchase of a further two cars costing GH₵19.8 million each
20X9 Replaced 15 cars purchased in 20X6 with another 15, each of which cost GH₵21 million. A trade-in allowance totalling GH₵48 million was received

Patowato Motors Limited prepares accounts to 31 December each year.
The finance director of Patowato Motors Limited, who is a qualified accountant, intends to apply the revaluation model to those of the company’s sports cars that appreciate in value. He intends to recognise revaluation increases in profit or loss and has told colleagues that this will boost the directors’ bonuses.

Required
(a) Prepare a vehicle account, an accumulated depreciation account, a depreciation account and a disposals account for the years 20X6 to 20X9.
(b) Explain why the finance director’s suggestion to revalue some vehicles is unethical

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  • 10 Marks

AAA – L3 – Q34 – Accounting Policies

List further information needed to form an opinion on Christina's lease premiums, refurbishment, and refit practices.

Christina retails women’s clothes through a chain of over 30 stores. Each of these stores is located in prime city-centre sites. The company is growing rapidly.

You are the audit manager in the firm that has recently been appointed as auditor to Christina. The audit partner has asked you to review a number of the company’s accounting policies and practices. These are set out below.

(1) The majority of the company’s sites are acquired on short leases (typically 10 to 25 years), with rent reviews usually every five years. A premium is usually paid to secure the lease, although this is normally associated with a period of reduced rent. Such premiums are capitalised and amortised over the life of the lease on a straight line basis.

(2) Before a new site can be opened for business it undergoes extensive refurbishment. During the refurbishment period, costs incurred (including rates and services as well as contractors’ fees) are debited to a holding account. On completion of the refurbishment, the costs are transferred to short leaseholds.

(3) Christina is very aware of the importance of image in the retail fashion industry. Following a survey by independent consultants, all the existing shops are to be restyled to project a new image. These costs will be capitalised.

Required

(a) Identify and comment on the accounting and auditing issues raised by the above.                                                                                    (b) List the further information that you require in order to be able to form an opinion on the above practices.

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