Question 1: Tangible asset

PPE of XYZ comprise of the following:

Plant Machinery
A B C D
at 31st Dec 20X4:
Cost 500 600 300 800
Accumulated Depn (100) (100) (200) (300)
Remaining useful years 4 5 1 5
Fair value as of 31st Dec 20X4 600 400 120 450
Fair value as of 31st Dec 20X5 200 470 - 350
XYZ wants to use the revaluation model on A from 20X4’s accounts onwards.
Company’s policy is to depreciate all assets using straight – line method.
Required:
- Fill in the following table and prepare journal entries for revaluation of NCA at 20X4
and 20X5
Plant A Plant B
CV as at 31st Dec 20X4 400 500
Surplus/Deficit 200 (100)
FV as at 31st Dec 20X4 600 400
Depreciation for 20X5 (150) (80)
CV as at 31st Dec 20X5 450 320
Deficit/Surplus (250) 150
FV as at 31st Dec 20X5 200 470

Question 2: Flightline (Tangible asset)

Flightline is an airline which treats its aircraft as complex NCAs. The costs and other
details of one of its aircraft are:
$000 Estimated life
Exterior structure – Purchase date – 1 Apr 1995 120,000 20 years
Interior cabin fittings – Replaced 1 Apr 2005 25,000 5 years
Engines (2 at $9mil each) – Replaced 1 Apr 2005 18,000 36,000 flying hours
No residual values are attributed to any of the component parts.
At 1 Apr 2008, the aircraft log showed it had flown 10,800 hours since 1 Apr 2005. In the
year ended 31 Mar 2009, the aircraft flew for 1,200 hours for the six months to 30 Sep
2008 and a further 1,000 hours in the six months to 31 Mar 2009.
On 1st Oct 2008, the aircraft suffered a “Bird Strike” accident which damaged one of the
engines beyond repair. This was replaced by a new engine with a life of 36,000 hours at
cost of $10.8 mil.
The other engine was also damaged, but was repaired at a cost of $3mil; however, its
remaining estimated useful life was shortened to 15,000 hours.
The accident also caused cosmetic damage to the exterior of the aircraft which required
repainting at a cost of $2mil.
As the aircraft was out of service for some weeks due to the accidents, Flightline took the
opportunity to upgrade its cabin facilities at a cost of $4.5 mil. This did not increase the
estimated remaining life of the cabin fittings, but the improved facilities enabled
Flightline to substantially increase the air fares on this aircraft.
Required:
Calculate the charges to the SOPL in respect of the aircraft for the year ended 31 Mar
2009 and its carrying amount in the SOFP as that date. (Show the calculation steps)
Question 3 (Gov grant):
On 1 January 2010, ABC acquired a machine at a cost of $60mil.
The economic useful life of the machine is estimated to be 10 years with a nil residual
value. ABC uses straight line depreciation.
ABC received a grant of $10m from the government on 1 Jan 2010 for the machine
acquisition
Required:
Using journalize entries to illustrate the accounting treatment for the gov grant of $10m
in 2 cases:
- the company recognize a deferred income for government grant
- The company recognize the machine at nominal value, government grant is directly
deducted from value of the machine.
Question 4: Gov grant
The following is an extract of Errsea’s balances of PPE and related government grants at
1st Apr 2006.
Cost $000 AccDep $000 CA $000
PPE 240 180 60
NCL
Gov grants 30
CL
Gov Grants 10
Details including purchases and disposals of plants and related gov grants during the year
are:
1. Included in the above figures is an item of plant that was disposed of on 1 Apr 2006 for
$12,000 which had cost $90,000 on 1 Apr 2003. The plant was being depreciated on a
straight line basis over four years assuming a residual value of $10,000. A gov grant was
received on its purchase and was being recognized in the PL in equal amounts over 4
years. In accordance with the terms of the grant, Errsea repaid $3,000 of the grant on the
disposal of the related plant.
2. An item of plant was acquired on 1 Jul 2006 with the following costs:
Base cost $192,000
Modifications specified by Errsea $12,000
Transport and installation $6,000
This plant qualified for a government grant of 25% of the base cost of the plant, but it had
not been received by 31 Mar 2007. The plant is to be depreciated on a straight line basis
over three years with a nil estimated residual value.
3. All other plant is depreciated by 15% per annum on cost.
4. $11,000 of the $30,000 NCL for government grants at 1 Apr 2006 should be
reclassified as a current liability as at 31 Mar 2007.
5. Depreciation is calculated on a time apportioned basis.
Required:
Prepare extracts of Errsea’s SOPL and SOFP in respect of the PPE and gov grants for the
year ended 31 Mar 2007.
Question 5: Lease
(a) The Conceptual Framework for Financial Reporting identifies faithful representation
as a fundamental qualitative characteristic of useful financial information.
Required:
Distinguish between fundamental and enhancing qualitative characteristics and
explain why faithful representation is important. (5 marks)
(b) Laidlaw has produced its draft financial statements for the year ended 30 September
2013 and two issues have arisen:
(i) On 1 September 2013, Laidlaw factored (sold) $2 million of trade receivables to
Finease. Laidlaw received an immediate payment of $1·8 million and credited this
amount to receivables and charged $200,000 to administrative expenses. Laidlaw will
receive further amounts from Finease depending on how quickly Finease collects the
receivables. Finease will charge a monthly administration fee of $10,000 and 2% per
month on its outstanding balance with Laidlaw. Any receivables not collected after four
months would be sold back to Laidlaw; however, Laidlaw expects all customers to settle
in full within this period. None of the receivables were due or had been collected by 30
September 2013. (5 marks)
(ii) On 1 October 2012, Laidlaw sold a property which had a carrying amount of $3·5
million to a property company for $5 million and recorded a profit of $1·5 million on the
disposal. Part of the terms of the sale are that Laidlaw will rent the property for a period
of five years at an annual rental of $400,000. At the end of this period, the property
company will sell the property through a real estate company/property agent at
its fair value which is expected to be approximately $6·5 million. Laidlaw will be given
the opportunity to repurchase the property (at its fair value) before it is put on the open
market.
All of the above amounts are deemed to be at commercial values. (5 marks)
Required:
Explain, and quantify where appropriate, how Laidlaw should account for the
above two issues in its financial statements for the year ended 30 September 2013.
Question 6: Impairment
ABC is currently undertaking an impairment review. One of its monitored CGU, X,
contains an allocated GW of $5m in accordance with IAS 36 for the purpose of
impairment testing. The required annual impairment test was conducted on 31 Dec 20X6.
The following is relevant to the individual assets of CGU X under review.
Before impairment Allocation of After impairment
$m impairment loss $m $m
GW 5 5 0
Asset A 20
Asset B 30
Asset C 40
CV 95 12 83
Fill in the above table in 2 following cases:
1. Assuming that the recoverable amount of CGU is assessed at $83m and the fair value
less cost to sell asset A is estimated at $22m
2. Assuming that CGU X’s recoverable amount is assessed at $82m and the fair value
less cost to sell asset A is estimated at $19m
Question 7: (IP)
(a) The accounting treatment of investment properties is prescribed by IAS 40 Investment
Property.
Required:
(i) Define investment property under IAS 40 and explain why its accounting treatment is
different from that of owner-occupied property;
(ii) Explain how the treatment of an investment property carried under the fair value
model differs from an owner-occupied property carried under the revaluation model.
(b) Speculate owns the following properties at 1 April 2012:
Property A: An office building used by Speculate for administrative purposes with a
depreciated historical cost of $2 million. At 1 April 2012 it had a remaining life of 20
years. After a reorganisation on 1 October 2012, the property was let to a third party and
reclassified as an investment property applying Speculate’s policy of the fair value
model. An independent valuer assessed the property to have a fair value of $2·3 million
at 1 October 2012, which had risen to $2·34 million at 31 March 2013.
Property B: Another office building sub-let to a subsidiary of Speculate. At 1 April 2012,
it had a fair value of $1·5 million which had risen to $1·65 million at 31 March 2013.
Required:
Prepare extracts from Speculate’s entity statement of profit or loss and other
comprehensive income and statement of financial position for the year ended 31 March
2013 in respect of the above properties. In the case of property B only, state how it would
be classified in Speculate’s consolidated statement of financial
position.
Note: Ignore deferred tax. (5 marks)
Question 8: Intangible assets
Teac PLC started developing its own MP6 devices brand “Orange”. The expenditure in
the period to 31 May 2006 was as follows:
Period Expenditure type $m
1 Jun 2005-31 Aug 2005 Research as to the extent of the market 24
1 Sep 2005 – 30 Nov 2005 Prototype devices and goods design 32
1 Dec 2005 – 31 Jan 2006 Refinement of products 16
1 Feb 2006 – 30 Apr 2006 Development work undertaken to finalise design of 40
product
1 May 2006 – 31 May 2006 Production and launch of products 48
160
The costs of the production and launch of the products include the cost of upgrading the
existing machinery ($24mil), market research costs ($16mil), and staff training cost
($8mil).
currently an intangible asset of $160 mil is shown in the FSs for the year ended 31 May
2006.
Required: Discuss how the above expenditures should be dealt with in the FSs of Teac
PLC for the year ended 31 May 2006
Question 10: Tax
Classified these following temporary differences and deferred tax:
1. a NCA which has carrying value of 9,600 and tax base of 0
2. Development cost of $45,000 is recognized as an asset in SOFP but is expensed off
100% in accordance with tax rules.
3. A provision for warranty is recognized as a liability in SOFP, but is recognized in full
as expense when goods are returned for repaired corresponding to tax rules.
4. According to tax rules, accrued expense of $1,000 is recognized in full as expense
when paid
5. According to tax rules, prepaid expense of $1,000 is recognized in full as expense
when paid
6. According to tax rules, accrued income of $1,000 is recognized in full as income when
cash is received
7. According to tax rules, prepaid income of $1,000 is recognized in full as income when
cash is received
Question 11: Tax
XYZ acquired 2 properties on 1st Jan X9. One is a factory used by XYZ as a production
facility and the other is an apartment that is leased to a 3rd party under an operating lease.
XYZ revalues all its properties to Current value at the end of each year.
Relevant details of the costs and fair values of the properties are:
Factory Apartment
$000 $000
Cost at 1st Jan 20X9 1,200 2,000
Valuation 31 Dec X9 1,400 2,300
Factory depreciation for the year ended 31st Dec X9 was $40,000
The tax rate of taxation is 20%
Prepare journal entries to account for the revaluation adjustments and related tax effect
for the year ended 31st Dec X9.
Question 12: Financial instrument
Elite PLC prepares its financial statements to 30 Jun each year. On 1 st July 20X3, Elite
PLC issued $10 mil 6% convertible bond at par on the following terms:
The bond is convertible into the company’s equity shares at the option of the bondholders
4 years after the date of issue (30 Jun X7) on the basis of 20 shares for each $100 of
bonds. Alternatively, it will be redeemed at par.
Financial consultants had advised that if Elite PLC had issued a similar loan stock
without the conversion rights, then it would have had to pay a coupon rate of 10% on the
loan stock.
The present value of $1 receivable at the end of each year, based on the relevant discount
rates can be taken as:
End of Year 1 1 3 4
10% 0.909 0.826 0.751 0.683
Required:
Calculate the finance charge to be shown in th SOCI and SOFP extracts for the year to 30
Jun X4 and X5
Question 13: financial instrument
On 1 January 20X1 Abacus Co purchases a debt instrument for its fair value of $1,000.
The debt instrument is due to mature on 31 December 20X5. The instrument has a
principal amount of $1,250 and the instrument carries fixed interest at 4.72% that is paid
annually. The effective rate of interest is 10%. How should Abacus Co account for the
debt instrument over its five year term?