Property Plant and Equipment

FR – L2 – Q85 – Business Combinations

Prepare Greetings Ltd's consolidated statement of financial position as at 31 Dec 20X4, including fair value adjustments for Farewell Ltd.

Question

On 1 January 20X1, Greetings Ltd acquired 60% of the ordinary share capital of Farewell Ltd for GH₵110,000. At that date Farewell Ltd had a retained earnings balance of GH₵60,000.
The following statements of financial position have been prepared as at 31 December 20X4.

Assets	Greetings Ltd	Farewell Ltd
Non-current assets	GH₵	GH₵
Property, plant and equipment	225,000	175,000
Investments in Farewell Ltd	110,000	–
Current assets	271,000	157,000
Total assets	606,000	332,000
Equity and liabilities
Capital and reserves
Share capital	100,000	100,000
Retained earnings	275,000	90,000
	375,000	190,000
Current liabilities	231,000	142,000
Total equity and liabilities	606,000	332,000

The fair value of Farewell Ltd’s net assets at the date of acquisition was determined to be GH₵170,000.
The difference between the book value and the fair value of the net assets at the date of acquisition was due to an item of plant which had a useful life of 10 years from the date of acquisition.
Required
Prepare the consolidated statement of financial position of Greetings Ltd and its subsidiary as at 31 December 20X4.

Answer

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Tags: Consolidated Financial Statements, Fair Value Adjustments, Goodwill, Non-controlling Interest, Property Plant and Equipment, Retained Earnings
Level: Level 2

Topic: Business Combinations (IFRS 3)

FR – L2 – Q83 – Business Combinations

Prepare Tough Ltd's consolidated statement of financial position as at 31 Dec 20X4, adjusting for intra-group asset transfer and fair value.

Question

On 31 December 20X0, Tough Ltd acquired 60% of the ordinary share capital of Gentle Ltd for GH¢110 million. The following statements of financial position have been prepared as at 31 December 20X4. Statements of Financial Position as at 31 December 20X4

	Tough Ltd	Gentle Ltd
	GH¢’000	GH¢’000
Assets
Non-current assets
Property, plant and equipment	225,000	175,000
Investments in Gentle Ltd	110,000	—
Current assets	271,000	157,000
	606,000	332,000
Equity and liabilities
Capital and reserves
Share capital	115,000	110,000
Retained earnings	260,000	80,000
	375,000	190,000
Current liabilities	231,000	142,000
	606,000	332,000

During the year to 31 December 20X4, Tough Ltd sold a tangible asset to Gentle Ltd for GH¢50 million. The asset was originally purchased in the year to 31 December 20X1 at a cost of GH¢100 million and had a useful economic life of five years. Gentle Ltd’s depreciation policy is 25% per annum based on cost. Both companies charge a full year’s depreciation in the year of acquisition and none in the year of disposal. Required Prepare the consolidated statement of financial position of Tough Ltd and its subsidiary as at 31 December 20X4.

Answer

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Topic: Business Combinations (IFRS 3)

FR – L2 – Q26 – Property, Plant and Equipment

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

Question

(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.

Answer

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Tags: Accounting Standards, IAS 16, Property Plant and Equipment, Residual Value, Useful Life
Level: Level 2

Topic: Financial Reporting Standards and Their Applications

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.

Question

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.

Answer

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Tags: Asset Valuation, Cost Model, Depreciation, Financial Statements, IAS 16, Inventory, Non-current Assets, Property Plant and Equipment, Revaluation, Revaluation Model
Level: Level 2

Topic: Financial Reporting Standards and Their Applications

FR – L2 – Q24 – Property, Plant and Equipment

Explain the effect of revising the useful life of a lathe on depreciation for 20X4.

Question

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.

Answer

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Tags: Depreciation, IAS 16, Property Plant and Equipment, Revaluation, Revaluation Reserve
Level: Level 2

Topic: Financial Reporting Standards and Their Applications

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

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

Question

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.

Answer

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Tags: Accounting policies, Asset Valuation, Cost Basis, Depreciation, Disposals, Financial Statements, IAS 16, Non-current Assets, Property Plant and Equipment, Revaluation
Level: Level 2

Topic: Financial Reporting Standards and Their Applications

AA – L2 – Q53 – Audit Procedures for Non-Current Assets

Audit procedures for verifying property, plant, and equipment schedules, additions, revaluation, and depreciation correction for Oakwood Enterprises.

Question

As a staff member of Reed and Spencer Chartered Accountants, you are assigned the audit of tangible non-current assets of Oakwood Enterprises for the year ended 31 March 20X8. Reed and Spencer have been the auditors of Oakwood Enterprises for many years. You obtain the following schedule of movements on property, plant, and equipment and analysis of additions from the company’s accountant.

	Property	Plant and machinery	Total
Cost or valuation	C’000	C’000	C’000
1 April 20X7	340	275	615
Additions	–	123	123
Disposals	–	(72)	(72)
Revaluations	120	–	120
31 March 20X8	460	326	786
Accumulated depreciation
1 April 20X7	24	213	237
Provision	5	30	35
Written back on disposal	–	(65)	(65)
Adjustment on revaluation	(24)	–	(24)
31 March 20X8	5	178	183
Carrying amount
31 March 20X7	455	148	603
31 March 20X8	316	62	378

Schedule of additions (plant and machinery)

Supplier	Description	Cost
New Models	Milling machine Model 38	55,000
Drill Suppliers	Power drill Type 45C	34,000
Hoist Co	Electric hoist no 722	18,000
Sundry below $1000		16,000
Total		123,000

The company’s accountant also advises you that the property was revalued following a valuation by the company’s property manager who is a professionally qualified valuer.
During your verification of depreciation, you discover that most plant and machinery is fully depreciated. Moreover, you discover that, due to oversight, depreciation has continued to be provided on fully depreciated items. As at the beginning of the year, the amount of overstatement was $43,000. The accountant suggests the correction be made by reducing the current year’s charge for depreciation.

Required:
(a) State, with reasons, the initial audit procedures you would perform on the schedules provided by the company’s accountant. (3 marks)
(b) Outline the substantive audit procedures you would apply in verifying additions to plant and machinery. Your answer should identify procedures applicable to each of the financial statement assertions. (8 marks)
(c) Describe the audit procedures applicable to verifying the revaluation of property. (5 marks)
(d) With respect to the correction to accumulated depreciation, and assuming the amount to be material, discuss the accountant’s proposed treatment. If you disagree with the accountant’s proposal, state, with reasons, the correct accounting treatment. (4 marks)

Answer

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Tags: Audit Procedures, Depreciation, Financial Statement Assertions, Non-current Assets, Property Plant and Equipment, Revaluation
Level: Level 2

Topic: Audit Evidence

AA – L2 – Q38 – Audit Evidence

Explain why the audit manager selected PPE, trade receivables, and inventory for further investigation at Mellow Manufacturing. List further information needed from Mellow Manufacturing's financial controller to clarify PPE, receivables, and inventory issues.

Question

Mellow Manufacturing is a long-established manufacturing company. The audit manager has been provided with the following extracts from the draft financial statements for £20X8 prior to the final audit planning meeting with the financial controller.

Draft statement of financial position (extracts)

	Draft 20X8 £’000	Actual 20X7 £’000
Property, plant and equipment	32,560	31,850
Receivables
Trade	7,250	4,340
Other	1,230	1,150
Inventory
Raw materials	2,900	2,100
Work-in-progress	1,450	1,860
Finished goods	2,340	2,020
Current liabilities
Trade	4,320	4,180
Other	2,450	2,340

Draft statement of comprehensive income (extracts)

	Draft 20X8 £’000	Actual 20X7 £’000
Revenue	43,150	40,680
Cost of sales	(29,180)	(28,890)
Gross profit	13,970	11,790
Distribution costs	(3,450)	(3,120)
Administrative expenses	(2,340)	(2,120)
Depreciation/loss on sale of PPE	(2,280)	(1,320)
Profit before tax	5,900	5,230

The manager has reviewed these extracts and has identified three financial statement headings which he believes require further investigation. These are property, plant and equipment, trade receivables, and inventory. He has also calculated the following accounting ratios:

	Draft 20X8	Actual 20X7
Trade receivables collection period	30 days	19 days
Inventory turnover	8.6 times	9.9 times
Gross profit percentage	32%	29%

Required
(a) Explain why the manager has selected these three headings for further investigation.

(b) Set out the further information that the manager should request from the financial controller at the final audit planning meeting in order to clarify the situation with regards to these financial statement headings.

Answer

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Tags: Audit Evidence, Audit Procedures, Financial Statement Analysis, Inventory, Property Plant and Equipment, Trade Receivables
Level: Level 2

Topic: Audit Evidence

Tag (SQ): Property Plant and Equipment

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FR – L2 – Q85 – Business Combinations

Prepare Greetings Ltd's consolidated statement of financial position as at 31 Dec 20X4, including fair value adjustments for Farewell Ltd.

FR – L2 – Q83 – Business Combinations

Prepare Tough Ltd's consolidated statement of financial position as at 31 Dec 20X4, adjusting for intra-group asset transfer and fair value.

FR – L2 – Q26 – Property, Plant and Equipment

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

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.

FR – L2 – Q24 – Property, Plant and Equipment

Explain the effect of revising the useful life of a lathe on depreciation for 20X4.

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

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

AA – L2 – Q53 – Audit Procedures for Non-Current Assets

Audit procedures for verifying property, plant, and equipment schedules, additions, revaluation, and depreciation correction for Oakwood Enterprises.

AA – L2 – Q38 – Audit Evidence

Explain why the audit manager selected PPE, trade receivables, and inventory for further investigation at Mellow Manufacturing. List further information needed from Mellow Manufacturing's financial controller to clarify PPE, receivables, and inventory issues.

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FR – L2 – Q85 – Business Combinations

Prepare Greetings Ltd's consolidated statement of financial position as at 31 Dec 20X4, including fair value adjustments for Farewell Ltd.

You're reporting an error for "FR – L2 – Q85 – Business Combinations"

FR – L2 – Q83 – Business Combinations

Prepare Tough Ltd's consolidated statement of financial position as at 31 Dec 20X4, adjusting for intra-group asset transfer and fair value.

You're reporting an error for "FR – L2 – Q83 – Business Combinations"

FR – L2 – Q26 – Property, Plant and Equipment

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

You're reporting an error for "FR – L2 – Q26 – Property, Plant and Equipment"

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.

You're reporting an error for "FR – L2 – Q25 – Financial Reporting Standards and Their Applications"

FR – L2 – Q24 – Property, Plant and Equipment

Explain the effect of revising the useful life of a lathe on depreciation for 20X4.

You're reporting an error for "FR – L2 – Q24 – Property, Plant and Equipment"

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

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

You're reporting an error for "FR – L2 – Q23 – Financial Reporting Standards and Their Applications"

AA – L2 – Q53 – Audit Procedures for Non-Current Assets

Audit procedures for verifying property, plant, and equipment schedules, additions, revaluation, and depreciation correction for Oakwood Enterprises.

You're reporting an error for "AA – L2 – Q53 – Audit Procedures for Non-Current Assets"

AA – L2 – Q38 – Audit Evidence

Explain why the audit manager selected PPE, trade receivables, and inventory for further investigation at Mellow Manufacturing. List further information needed from Mellow Manufacturing's financial controller to clarify PPE, receivables, and inventory issues.

You're reporting an error for "AA – L2 – Q38 – Audit Evidence"

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