U Win Bo Myint Accounting CPA

IAS 16 (Homework)
Question – 1
On 1 January 2010, Allen Ltd purchased a new machine, the Defoe. Details of the transaction are as follows.
(1) List price – £300,000
(2) Trade discount given – 10% of list price
(3) Settlement discount received – 5% of list price, net of trade discount
(4) Electrical installation – £38,000
(5) Staff training in use of the Defoe machine – £15,000
(6) Pre-production testing – £10,000
(7) Maintenance contract for three years – £36,000
Allen Ltd had wrongly specified the requirements for the electrical installation. The £8,000 cost of correcting this
mistake is included in the £38,000 above.
Required
Calculate the initial amount to be included under fixed assets, in respect of the Defoe machine, at 1 January
2010. Assume it was ready to produce units of output on that day. (3 marks)

Question- 2
A company is planning to purchase a small aircraft. The aircraft will cost $500,000 and will be purchased on 1
January 2010. The company’s accounting year runs from 1 January to 31 December. The aircraft has an
expected useful of five year and a residual value of $50,000.
The expected flying hours of the aircraft over the next five years are as follow;
2010 600 hours
2011 1800 hours
2012 500 hours
2013 600 hours
2014 500 hours

The company directors are unsure of how the aircraft should be depreciated, and what impact the choice of
method would have on the income statement and Statement of Financial Position each year. They are
considering using one of the following methods of depreciation
(i) Straight line
(ii) Reducing balance at a rate of 40% per year
(iii) Flying hours (equivalent to machine hours)
(iv) Sum of year’s digits

Required
Using each of the above methods, calculated for each of the years 2010 and 2011.
(i) The depreciation charge to the income statement
(ii) The net book value at Statement of Financial Position. (4marks)

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U Win Bo Myint Accounting CPA

Question – 3
Extravagant Inc. is installing a new plant at its production facility. It has incurred these costs:
1. Cost of the plant (cost per supplier’s invoice plus taxes) $2,500,000
2. Initial delivery and handling costs $200,000
3. Cost of site preparation $600,000
4. Consultants used for advice on the acquisition of the plant $700,000
5. Interest charges paid to supplier of plan for deferred credit $200,000
6. Estimated dismantling costs to be incurred after 7 years $300,000
7. Operating losses before commercial production $400,000

Required
Please advise Extravagant Inc. on the costs that can be capitalized in accordance with IAS 16. (3 marks)

Question – 4
Omega is a listed company which prepares financial statements in accordance with International Financial
Reporting Standards (IFRS).
On 1 October 20X2, Omega purchased some land for $10m (including legal costs of $1m) in order to construct a
new factory. Construction work commenced on 1 November 20X2. Omega incurred the following costs in
connection with its construction:
 Preparation and levelling of the land – $300,000
 Purchase of materials for the construction – $6.08m in total
 Employment costs of the construction workers – $200,000 per month
 Overhead costs incurred directly on the construction of the factory – $100,000 per month
 Ongoing overhead costs allocated to the construction project using Omega's normal overhead allocation
model – $50,000 per month
 Income received during the temporary use of the factory premises as a car park during the construction
period – $50,000
 Costs of relocating employees to work at the new factory – $300,000
 Costs of the opening ceremony on 31 July 20X3 – $150,000
The factory was completed on 31 May 20X3 and production began on 1 August 20X3. The overall useful life of
the factory building was estimated at 40 years from the date of completion. However, it is estimated that the roof
will need to be replaced 20 years after the date of completion and that the cost of replacing the roof at current
prices would be 30% of the total cost of the building. At the end of the 40-year period Omega has a legally
enforceable obligation to demolish the factory and restore the site to its original condition. The directors estimate
that the cost of demolition in 40 years' time (based on prices prevailing at that time) will be $20m. An annual risk
adjusted discount rate which is appropriate to this project is 8%. The present value of $1 payable in 40 years'
time at an annual discount rate of 8% is 4.6 cents.
Required
Compute the carrying amount of the factory in the statement of financial position of Omega at 30 September
20X3.You should explain your treatment of all the amounts referred to in this part in your answer. (7 marks)

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U Win Bo Myint Accounting CPA

Question – 5
The components of the cost of a major item of equipment are given below:
$
Purchase price 780,000
Import duties 117,000
Sale tax (refundable) 78,000
Site preparation 30,000
Installation 28,000
Testing 10,000
Initial losses before asset reaches planned performance 50,000
Discounted cost of dismantling and removal at end of useful life 40,000
1,133,000

What amount should be recognised as the cost of the asset in accordance with IAS 16 Property, plant
and equipment? (2 marks)

Question – 6
On 1 July 2014, Experimenter opened a chemical reprocessing plant. The plant was due to be active for five
years until 30 June 2019, when it would be decommissioned. At 1 July 2014, the costs of decommissioning the
plant were estimated to be $4 million in 5 years time. The company considers that a discount rate of 12% is
appropriate for the calculation of a present value, and the discount factor at 12% for Year 5 is 0.567.
What is the total charge to the statement of profit or loss (depreciation and finance charge) in respect of
the decommissioning for the year ended 30 June 2015? (2 marks)

Question – 7
Liza bought a guillotine for her framing business for $20,000 on 1 July 20X7. She expected the guillotine to have
a useful life of ten years and a residual value of $500. On 1 July 20X8, Liza revised these estimates and now
believes the guillotine to have a remaining useful life of 5 years and no residual value.

What was the depreciation charge for the year ended 30 June 20X9?

Question – 8

Baker Co purchased an asset for $100,000 on 1.1.2001.It had an estimated useful life of 5 year and it was
depreciated using the reducing balance method at a rate of 40%. On 1.1.2003 it was decided to change the
method to straight line.

What is the carry amount of the asset at 31.12.2003?

Question – 9

Senakuta co purchased a machine with an estimated useful life of 5 year for $34,000 on 30 September 20X5.
Senakuta co planned to scrap the machine at the end of its useful life and estimated that the scrap value at the
purchased date was $4,000. On 1 October 20X8, Senakuta revised the scrap value to $2,000 due to the
decreased value of scrap metal.

What is the depreciation charge for the year ended 30 September 20X9?