STUDY SESSION

Panama bought an item of property, plant and equipment for $80 million on 1 January 2012. The
asset had zero residual value and was to be depreciated over its estimated useful life of 20 years. On
1 January 2015 the asset was revalued to its fair value of $95 million. Calculate the amounts to
shown in the financial statements of Panama for the year-ended 31 December 2015.

On 1 January 2013, Panama purchased an item of property, plant and equipment for $12 million.
Panama uses the revaluation model to value its non-current assets. The asset has zero residual value
and is being depreciated over its estimated useful life of 10 years. At 31 December 2014, the asset
was revalued to $14 million but at 31 December 2015, the value of the asset had fallen to $8 million.
Panama has not taken the effect of the revaluation at 31 December 2015 in its financial statements.
Calculate the amounts to shown in the financial statements of Panama for the year-ended 31
December 2015.

Ecuador bought an item of property, plant and equipment for $25 million on 1 January 2012 and
depreciated over its useful life of 10 years. On 31 December 2014, the assets remaining life was
estimated as 5 years. Calculate the amounts to shown in the financial statements of Ecuador for the
year-ended 31 December 2015.

Columbia commenced the construction of an item of property, plant and equipment on 1 March
2015 and funded it with a $10 million loan. The rate of interest on the borrowings was 5%. Due to a
strike no construction took place between 1 October and 1 November. Calculate the amount of
interest to be capitalised as par to of non-current assets if Columbia’s reporting date is 31 December
2015.

Tweddle bought an item of property, plant and equipment for $10 million and received a
government grant of $2 million. The PPE has a useful life of 10 years and has no residual value.
Explain how the purchase of the property, plant and equipment and government grant would be
dealt with in the financial statements of Tweddle.

Addlington owns a property that it is using as its head office. At 1 January 2015, its carrying value
was $20 million and its remaining useful life was 20 years. On 1 July 2015 the business was
reorganised cheaper premises were found for use as a head office. It was therefore decided to lease
the property under an operating lease. The property was valued by a qualified professional, who
assessed the property’s value as $21 million on 1 July and $21.6 million on 31 December 2015.
Explain the accounting treatment of the property in the financial statements for the year-ended 31
December 2015.

Booker is involved in developing new products and has spent $15 million on acquiring a patent to aid
in this development. The initial investigative phase of the project cost an additional $6 million,
whereby it was determined that the future feasibility of the product was guaranteed. Subsequent
expenditure incurred on the product was $8 million, of which $5 million was spent on the
functioning prototype and the remainder on getting the product into a safe and saleable condition. A
further $1 million was spent on marketing and $0.5 million on training sales staff on how to
demonstrate the use of the product. At the reporting date the product had not yet been completed.
Explain how Booker should account for the expenditure in its financial statements.

Peter owned 100% of the equity share capital of Sharon, a wholly-owned subsidiary. The assets at
the reporting date of Sharon were as follows:

$’000

Goodwill 2,400

Buildings 6,000

Plant and equipment 5,200

Other intangibles 2,000

Receivables and cash 1,400

17,000

On the reporting date a fire within one of Sharon’s buildings led to an impairment review being
carried out. The recoverable amount of the business was determined to be $9.8 million. The fire
destroyed some plant and equipment with a carrying value of $1.2 million and there was no option
but to scrap it. The remaining plant was worth at least its carrying value. The other intangibles
consist of a licence to operate Sharon’s plant and equipment. Following the scrapping of some of the
plant and equipment a competitor offered to purchase the patent for $1.5 million. The receivable
and cash are both stated at their realisable value and do not require impairment. Show how the
impairment loss in Sharon is allocated amongst the assets.

Note: Within a group of companies where there are several subsidiaries, the individual CGUs
(subsidiaries) are tested for impairment first, before the overall value of the business is tested.

Cap bought a building on 1 January 20X1. The purchase price was $2.9m, associated legal
fees were $0.1m and general administrative costs allocated to the purchase were $0.2m. Cap
also paid sales tax of $0.5m, which was recovered from the tax authorities. The building was
attributed a useful life of 50 years. It was revalued to $4.6m on 31 December 20X4 and was
sold for $5m on 31 December 20X5.
Cap purchased a machine on 1 January 20X3 for $100,000 and attributed it with a useful life
of 10 years. On 1 January 20X5, Cap reduced the estimated remaining useful life to 4 years.
Required:
Explain how the above items of property, plant and equipment would have been
accounted for in all relevant reporting periods up until 31 December 20X5.

On 1 June 20X1, Clock received written confirmation from a local government agency that it
would receive a $1 million grant towards the purchase price of a new office building. The
grant becomes receivable on the date that Clock transfers the $10 million purchase price to
the vendor.
On 1 October 20X1 Clock paid $10 million in cash for its new office building, which is
estimated to have a useful life of 50 years. By 1 December 20X1, the building was ready for
use. Clock received the government grant on 1 January 20X2.
Required:
Discuss the possible accounting treatments of the above in the financial statements of
Clock for the year ended 31 December 20X1.

On 1 January 20X1, Hi-Rise obtained planning permission to build a new office building.
Construction commenced on 1 March 20X1. To help fund the cost of this building, a loan for
$5 million was taken out from the bank on 1 April 20X1. The interest rate on the loan was
10% per annum.
Construction of the building ceased during the month of July due to an unexpected shortage
of labour and materials.
By 31 December 20X1, the building was not complete. Costs incurred to date were $12
million (excluding interest on the loan).
Required:
Discuss the accounting treatment of the above in the financial statements of Hi-Rise for
the year ended 31 December 20X1.

Lavender owns a property, which it rents out to some of its employees. The property was
purchased for $30 million on 1 January 20X2 and had a useful life of 30 years at that date. On
1 January 20X7 it had a market value of $50 million and its remaining useful life remained
unchanged. Management wish to measure properties at fair value where this is allowed by
accounting standards.
Required:
How should the property be treated in the financial statements of Lavender for the year
ended 31 December 20X7.

ABC owns a building that it used as its head office. On 1 January 20X1, the building, which
was measured under the cost model, had a carrying amount of $500,000. On this date, when
the fair value of the building was $600,000, ABC vacated the premises. However, the
directors decided to keep the building in order to rent it out to tenants and to potentially
benefit from increases in property prices. ABC measures
investment properties at fair value. On 31 December 20X1, the property has a fair value of
$625,000.
Required:
Discuss the accounting treatment of the building in the financial statements of ABC for
the year ended 31 December 20X1.

Ten years ago, Innovate developed a video game called ‘Our Sports’.
This game sold over 10 million copies around the world and was extremely profitable. Due to
its popularity, Innovate release a new game in the Our Sports series every year. The games
continue to be best-sellers.
The directors have produced cash flow projections for the Our Sports series over the next five
years. Based on these projections, they have prudently valued the Our Sports brand at $20
million and wish to recognise this in the statement of financial position as at 30 September
20X3.
On 30 September 20X3, Innovate also paid $1 million for the rights to
the ‘Pets & Me’ videogame series after the original developer went into administration.
Required:
Discuss the accounting treatment of the above in the financial statements of Innovate
for the year ended 30 September 20X3.

During the year ended 31 December 20X1, Scone spent $2 million on researching and
developing a new product. The entity has recognised all $2 million as an intangible asset. A
breakdown of the expenditure is provided below:
$m
Research into materials 0.5
Market research 0.4
Employee training 0.2
Development activities 0.9
The expenditure on development activities was incurred evenly over the year. It was not until
1 May 20X1 that market research indicated that the product was likely to be profitable. At the
reporting date, the product development was not yet complete.
Required:
Discuss the correct accounting treatment of the research and development expenditure
in the year ended 31 December 20X1.

On 31 December 20X1, an entity noticed that one of its items of plant and machinery is often
left idle. On this date, the asset had a carrying amount of $500,000 and a fair value of
$325,000. The estimated costs required to dispose of the asset are $25,000.
If the asset is not sold, the entity estimates that it would generate cash inflows of $200,000 in
each of the next two years. Assume that the cash flows occur at the end of each year. The
discount rate that reflects the risks specific to this asset is 10%.
Required:
(a) Discuss the accounting treatment of the above in the financial statements for the
year ended 31 December 20X1.
(b) How would the answer to part (a) be different if there was a balance of $10,000 in
other components of equity relating to the prior revaluation of this specific asset?

An entity has three stages of production:

 A – growing and felling trees
 B – creating parts of wooden furniture
 C – assembling the parts from B into finished goods.
The output of A is timber that is partly transferred to B and partly sold in an external market.
If A did not exist, B could buy its timber from the market. The output of B has no external
market and is transferred to C at an internal transfer price. C sells the finished product in an
external market and the sales revenue achieved by C is not affected by the fact that the three
stages of production are all performed by the entity.
Required:
Identify the cash-generating unit(s).

Capit has identified an impairment loss of $41m for one of its cash generating units. The
carrying amount of the unit’s net assets was $150m, whereas the unit’s recoverable amount
was only $109m. The draft values of the net assets of the unit are as follows:
$m
Goodwill 13
Property 20
Machinery 49
Vehicles 35
Patents 14
Net monetary assets 19
––––
150
––––
The net selling price of the unit’s assets were insignificant except for the property, which had
a market value of $35m. The net monetary assets will be realised in full.
Required:
How is the impairment loss allocated to the assets within the cash-generating unit?

There was an explosion in a factory. The carrying amounts of its assets were as follows:
$000
Goodwill 100
Patents 200
Machines 300
Computers 500
Buildings 1,500
–––––
2,600
–––––
The factory operates as a cash-generating unit. An impairment review reveals a net selling
price of $1.2 million for the factory and value in use of $1.95 million. Half of the machines
have been blown to pieces but the other half can be sold for at least their carrying amount.
The patents have been superseded and are now considered worthless.
Required:
Discuss, with calculations, how any impairment loss will be accounted for.

Boxer purchased a non-current asset on 1 January 20X1 at a cost of $30,000. At that date, the
asset had an estimated useful life of ten years. Boxer does not revalue this type of asset, but
accounts for it on the basis of depreciated historical cost. At 31 December 20X2, the asset
was subject to an impairment review and had a recoverable amount of $16,000.
At 31 December 20X5, the circumstances which caused the original impairment to be
recognised have reversed and are no longer applicable, with the result that recoverable
amount is now $40,000.
Required:
Explain, with supporting computations, the impact on the financial statements of the
two impairment reviews.
On 31 December 20X2, an impairment review was conducted on a cash generating unit and
the results were as follows:
Asset Carrying Carrying
Amount pre-impairment Impairment amount
post-impairment

$000 $000 $000

Goodwill 100 (100) Nil
Property, plant
and equipment 300 (120) 180
––––– ––––– –––––
400 (220) 180
 ––––– ––––– –––––
The property, plant and equipment was originally purchased for $400,000 on 1 January 20X1
and was attributed a useful life of 8 years.
At 31 December 20X3, the circumstances which caused the original impairment have
reversed and are no longer applicable. The recoverable amount of the cash generating unit is
now $420,000.
Required:
Explain, with supporting computations, the impact of the impairment reversal on the
financial statements for the year ended 31 December 20X3.

Baklava has an investment property that is measured at fair value. This property is rented out
on short-term leases.
The directors wish to fair value the property by estimating the present value of the net cash
flows that the property will generate for Baklava.
They argue that this best reflects the way in which the building will generate economic
benefits for Baklava.
The building is unique, although there have been many sales of similar buildings in the local
area.
Required:
Discuss whether the valuation technique suggested by the directors complies with
International Financial Reporting Standards.

An asset is sold in two different active markets at different prices. An entity enters into
transactions in both markets and can access the price in those markets for the asset at the
measurement date as follows:
Market 1 Market 2
$ $
Price 26 25
Transaction costs (3) (1)
Transport costs (2) (2)
–––– ––––
Net price received 21 22
–––– ––––
What is the fair value of the asset if:
(a) market 1 is the principal market for the asset?
(b) no principal market can be determined?

Five Quarters has purchased 100% of the ordinary shares of Three Halves and is trying to
determine the fair value of the net assets at the acquisition date.
Three Halves owns land that is currently developed for industrial use. The fair value of the
land if used in a manufacturing operation is $5 million. Many nearby plots of land have been
developed for residential use (as high-rise apartment buildings). The land owned by Three
Halves does not have planning permission for residential use, although permission has been
granted for similar plots of land. The fair value of Three Halves’ land as a vacant site for
residential development is $6 million.
However, transformation costs of $0.3 million would need to be incurred to get the land into
this condition.
Required:
How should the fair value of the land be determined?
A herd of five 4 year-old pigs was held on 1 January 20X3. On 1 July 20X3 a 4.5
year-old pig was purchased for $212.
The fair values less estimated point of sale costs were:
 4 year-old pig at 1 January 20X3 $200
 4.5 year-old pig at 1 July 20X3 $212
 5 year-old pig at 31 December 20X3 $230
Required:
Calculate the amount that will be taken to the statement of profit or loss for the year
ended 31 December 20X3.

McDonald operates a dairy farm. At 1 January 20X1, he owns 100 cows worth
$1,000 each on the local market. At 31 December 20X1, he owns 105 cows worth
$1,100 each. During 20X1 he sold 40,000 gallons of milk at an average price of $5 a
gallon. When cows are sold at the local market, the auctioneer charges a
commission of 4%.
Show extracts from the financial statements for 20X1 for these activities,
assuming that no cows were purchased or sold during the year.

GoodWine is a company that grows and harvests grapes. Grape vines, which produce a new
harvest of grapes each year, are typically replaced every 30 years. Harvested grapes are sold
to wine producers.
With regards to property, plant and equipment, GoodWine accounts for land using the
revaluation model and all other classes of assets using the cost model.
On 30 June 20X1, its grape vines had a carrying amount of $300,000 and a remaining useful
life of 20 years. The grapes on the vines, which are generally harvested in August each year,
had a fair value of $500,000. The land used for growing the grape vines had a fair value of
$2m.
On 30 June 20X2, grapes with a fair value of $100,000 were harvested early due to unusual
weather conditions. The grapes left on the grape vines had a fair value of $520,000. The land
had a fair value of $2.1m. All selling costs are negligible and should be ignored.
Required:
Discuss the accounting treatment of the above in the financial statements of GoodWine
for the year ended 30 June 20X2.

On 1 January 20X1, Michelle Co bought a stamping machine for $20,000.

It has an expected useful life of 10 years and a nil residual value. On 30 September
20X3, Michelle Co decides to sell the machine and starts actions to locate a buyer.
The machines are in short supply, so Michelle Co is confident that the machine will
be sold fairly quickly. Its market value at 30 September 20X3 is $13,500 and it will
cost $500 to dismantle the machine and make it available to the purchaser. The
machine has not been sold at the year end.
At what value should the machine be stated in Michelle Co’s statement of
financial position at 31 December 20X3?

St. Valentine produced cards and sold roses. However, half way through
the year ended 31 March 20X6, the rose business was closed and the
assets sold off, incurring losses on the disposal of non-current assets of
$76,000 and redundancy costs of $37,000. The directors reorganised the
continuing business at a cost of $98,000.
Trading results may be summarised as follows:
 Cards Roses
$000 $000
Revenue 650 320
Cost of sales 320 150
Distribution 60 90
Administration 120 110
Other trading information (to be allocated to continuing operations) is as
follows:
$000
Finance costs 17
Tax 31
Required:
(a) Draft the statement of profit or loss for the year ended 31 March 20X6.
(b) Explain how an IFRS 5 Discontinued Operations presentation can make
information more useful to the users of financial statements.

Hyssop is preparing its financial statements for the year ended

31 December 20X7.
(a) On 1 December 20X7, the entity became committed to a plan to sell a surplus office
property and has already found a potential buyer. On 15 December 20X7 a survey was
carried out and it was discovered that the building had dry rot and substantial remedial work
would be necessary. The buyer is prepared to wait for the
work to be carried out, but the property will not be sold until the problem has been rectified.
This is not expected to occur until summer 20X8.
Required:
Can the property be classified as ‘held for sale’?
(b) A subsidiary entity, B, is for sale at a price of $3 million. There has been some interest
from prospective buyers but no sale as of yet.
One buyer has made an offer of $2 million but the Directors of Hyssop rejected the offer. The
Directors have just received advice from their accountants that the fair value of the business
is $2.5 million. They have decided not to reduce the sale price of B at the moment.
Required:
Can the subsidiary be classified as ‘held for sale’?
On 1 January 20X1, AB acquires a building for $200,000 with an expected life of 50 years.
On 31 December 20X4 AB puts the building up for immediate sale. Costs to sell the building
are estimated at $10,000.
Required
Outline the accounting treatment of the above if the building had a fair value at 31
December 20X4 of:
(a) $220,000
(b) $110,000.

Nash purchased a building for its own use on 1 January 20X1 for $1m and attributed it a 50
year useful life. Nash uses the revaluation model to account for buildings.
On 31 December 20X2, this building was revalued to $1.2m.
On 31 December 20X3, the building met the criteria to be classified as held for sale. Its fair
value was deemed to be $1.1m and the costs necessary to sell the building were estimated to
be $50,000.
Nash does not make a reserves transfer in respect of excess depreciation.
Required:
Discuss the accounting treatment of the above.

David acquires Rose on 1 March 20X7. Rose is a holding entity with two wholly-owned
subsidiaries, Mickey and Jackie. Jackie is acquired exclusively with a view to resale and
meets the criteria for classification as held for sale. David’s year-end is 30 September.
On 1 March 20X7 the following information is relevant:
 the identifiable liabilities of Jackie have a fair value of $40m
 the acquired assets of Jackie have a fair value of $180m
 the expected costs of selling Jackie are $5m.
On 30 September 20X7, the assets of Jackie have a fair value of $170m.
The liabilities have a fair value of $35m and the selling costs remain at $5m.
Discuss how Jackie will be treated in the David Group financial statements on
acquisition and at 30 September 20X7.