IAS 16 - PPE Question Bank

CHARTERED ACCOUNTANTS ACADEMY
FINANCIAL ACCOUNTING & REPORTING DEPARTMENT
CERTIFICATE OF THEORY IN ACCOUNTING
IAS 16 PROPERTY, PLANT & EQUIPMENT
Contents
INTRODUCTION ................................................................................. Error! Bookmark not defined.
QUESTIONS..................................................................................................................................... 2
KERSHAW LIMITED...................................................................................................................... 2
YOYO LIMITED............................................................................................................................. 5
HIGHWAY INTERNATIONAL LIMITED ........................................................................................... 9
MARY INDIVIDUAL .................................................................................................................... 12
PEASY LIMITED .......................................................................................................................... 15
ORBISON LIMITED ..................................................................................................................... 19
LESUTHU FISHERIES .................................................................................................................. 23
DEMBELE LIMITED .................................................................................................................... 26
Page 1 of 31 ©Chartered Accountants Academy 2019

QUESTIONS
KERSHAW LIMITED
The following is an extract from the trail balance of Kershaw Limited for the year ended 30 June
20X4:
KERSHAW LIMITED
EXTRACT FROM TRIAL BALANCE AT 30 JUNE 20X4
Debit Credit
Land (Plot 20 Melrose Estate) acquired 1/1/20X2, at cost 80 000
Office buildings available for use on 30/6/20X4, at cost 50 000
Fixtures and fittings, at cost 60 000
Accumulated depreciation of fixtures and fittings at 10 000

1/7/20X3
 Depreciation is calculated at 10% per annum reducing balance on fixtures and fittings.
 No depreciation is calculated on land.
 Building are depreciated at 2% per annum on the straight line basis.
 All residual values are assessed to be zero, having remained unchanged since acquisition.
REQUIRED Marks
A 8
Prepare the property, plant and equipment note to the financial statements for
the year ended 30 June 20X4.
Accounting policies are required.
Comparatives are not required.

Suggested Solution
KERSHAW LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 20X4
1 Statement of compliance (not required)
The financial statements have been prepared in accordance with International Financial Reporting
Standards.
2 Basis of preparation (not required)
The financial statements are prepared in accordance with the historical cost convention.
3. Significant accounting policies
The financial statements incorporate the following principle accounting policies, which are consistent
in all material respects with those applied in the previous year.
3.1 Property, plant and equipment
No depreciation is provided on land. Fixtures and fittings are depreciated at 10% per annum using
the reducing balance method. Buildings are depreciated at 2% per annum on the straight line
method.
10. Property, plant and equipment

Land Buildings Fixtures and fittings Total
C C C C
Cost
Balance 1/7/20X3 80 000 - 60 000 140 000
Constructed - 50 000 50 000
Balance 30/6/20X4 80 000 50 000 60 000 190 000
Accumulated
depreciation
Balance 1/7/20X3 - - 10 000 10 000
Current depreciation - -** 5 000* 5 000
Balance 30/6/20X4 - - 15 000 15 000
Carrying amount
1/7/20X3 80 000 - 50 000 130 000
30/6/20X4 80 000 50 000 45 000 175 000
* Calculation of current depreciation: (60 000 – 10 000) x 10% = 5 000
** No depreciation as the building was brought into use on the last day of the financial year.

YOYO LIMITED
You are the auditor of a huge manufacturing company called Yoyo Limited, which has a December
year-end. With the implementation of International Financial Reporting Standards, the accountant
of Yoyo Limited feels that he has lost touch with the basic principles governing the accounting
treatment of certain elements. He has approached you regarding three issues that need clarification
before the current financial statements for the year ended 31 December 20X0 may be finalised.
Issue a) Internal manufacture of machine B
Included in non-current assets in Yoyo Limited’s statement of financial position at 31 December

20X0 is a ‘‘Machine B’’ at a carrying smount of C400 000.Machine B was manufactured by Yoyo
Limited during april 20X0.The machine was completed and available for use on 1 May 20X0 and was
brought into commercial production on 31May 20X0.Including in the cost of C400 000 were the
following amounts :
 Raw material of C150 000 (Including C20 000 materials that were destroyed when a strike
by the workers ended in a warehouse being set alight)
 Depreciation of other materials used in the manufacture of machine B : C80000.
 Labour cost of C100 000.
 Admissions overheads of C70 000.
Issue b) Acquisition of a Crane
Yoyo limited owns only one crane,which is uncluded in property plant and equipment at C500 000
at 31 December 20X0.This crane was acquired at 31 December 20X0 by exchanging the previously
owned crane (with a carrying amount of C500 000) stationed at the Durban harbour mouth for the
newly acquired crane situated at Richards Bay harbour.
The accountant was aware that the fair value of the newly acquired crane is actually C400 000 but
believed that no adjustment is required since this is considered to be an ‘‘exchange of similar
assets’’.He added that although it would appear that the company made a loss in the exchange of
the two cranes,this is offset by the savings in not having to phytsically move the Durban crane to the
Richards Bay hartbour were the crane will need to be stationed from now on.Relocation costs were
expected to be approximately C100 000.
Issue c) Repaining of factory building
The factory building was repainted during the current year ended 31 December 20X0 at a cost of
C100 000.The cost of painting was capitalised to the building on the grounds that the cost of painting
was ‘‘Unavoidable’’ since the Directors believed that the building was ‘‘looking shabby’’.
Issue d) Replacing interior walls
The interior wall partitions in the Administration building were replaced and remodelled during the
current year ended 31December 20X0 at a cost of C1 000 000.This was done inorder to create a
more efficient working environment with an open plan workspace and meeting rooms.

REQUIRED Marks
A 15
Critically analyse each of the above issues, explain whether the accounting
treatment is correct or incorrect and justify your advise with reference to
International Financial reporting standards.Your answer must be broken down
into four separate discussions under the headings given in the question.

Suggested Solution
Issue a) Internal manufacture of Machine B
All costs necessarily incurred in bringing the asset ‘to a location and condition for it to be capable of
operating in a manner intended by management’ IAS 16.16(b) should be capitalised.
This means that the following costs may not be capitalised (all other costs were correctly
capitalised):
The C20 000 materials destroyed – all unnecessary wastage is expressly not allowed to be
capitalised. Per IAS 16.22, ‘the cost of abnormal amounts of wasted material, labour, or
other resources incurred in self-constructing an asset is not included in the cost of the
asset.’
Administration overheads of C70 000 – unless it can be proved that these costs were directly
linked to the manufacture of the machine.
The capitalisation of the other costs is correct on the grounds that:
Raw materials, labour and the depreciation of other machinery used in the manufacture of
machine B would be classified as costs necessarily incurred in bringing the asset to a
location and condition enabling it to be used.
Property, plant and equipment must be depreciated from the date on which it first becomes
available for use and thus this machine should be depreciated from 1 May 20X0. This has obviously
not been done since the carrying amount at year-end equals the cost of manufacture.
Issue b) Acquisition of a crane
Where an asset is acquired in exchange for another asset, the newly acquired asset should be
brought into the accounting records at the fair value of the asset given up. Where this fair value is
not available, or the fair value of the acquired asset is considered to be more clearly evident, the
fair value of the newly acquired asset should be used instead (in this case, C400 000). The only
time that the carrying amount of the asset given away may be used is if neither of the fair values
was available or there was no commercial substance to the transaction (i.e. the assets are very
similar).
The difference between the carrying amount of the old crane (C500 000) and the available fair value
of the new crane (C400 000) should be recognised as a loss on exchange of C100 000 (C500 000 –
C400 000). The new crane should then be recognised at C400 000, this fair value being considered
to be more clearly evident.
Although costs necessarily incurred in bringing the asset to a location/ condition that enables it to
be used must be capitalised, costs that are avoided may not be capitalised since they have not been
incurred. The relocation costs that were avoided should, therefore, not be considered in the debate
regarding the measurement of newly acquired crane.
Issue c) Repainting of the administration building.

IAS 16 makes no distinction in principle between the initial cost of acquiring an item and the day-to-
day expenditure on it.
The cost of an item of property plant and equipment is recognised as an asset if, and only if:
It is probable that future economic benefits associated with the item will flow to the entity;
IAS 16.7(a) and
The cost of the item can be measured reliably. IAS 16.7(b)
An entity evaluates under the recognition principle all its property, plant and equipment costs at the
time they are incurred. The costs include costs incurred initially to acquire or construct an item of
property, plant and equipment and costs incurred subsequently to add to, replace part of, or service
it. IAS 16.10
However, under the recognition principles in IAS 16.7, an entity does not recognise in the carrying
amount of an item of property, plant and equipment the cost of the day-to-day servicing of the item.
Rather, these costs are recognised in profit or loss as incurred. Costs of day-to-day servicing are
primarily the costs of labour and may include the cost of small parts. The purpose of these
expenditures is often described as for the ‘repair and maintenance’ of the item of property, plant
and equipment. IAS 16.12
It is submitted that the repairs to the building cannot be separately recognised as a component of
property, plant and equipment and the whole amount should be expensed.
Issue d) Replacing the interior walls
It is necessary to consider the same factors as for Issue (c), that is, IAS 16 makes no distinction in
principle between the initial cost of acquiring an item and the day to day expenditure on it.
It is submitted that the replacement of the interior walls does extend the useful life of the building,
thus giving rise to future economic benefit. The cost of the interior walls of C1 000 000 should
therefore be recognised as an asset. The carrying amount of the existing interior walls should be
derecognised.

HIGHWAY INTERNATIONAL LIMITED
Highway International Limited constructed its own specially designed ‘asphalt mixing plant’. Details
of relating costs incurred are as follows:
 Raw materials were purchased, on 1 August 20X2, at a cost of C650 000, of which only C130 000
was used, during December 20X2, in the construction of the plant.
 In order to comply with safety regulations, the plant had to undergo extensive testing on 31
March 20X3, which cost the company C26 000.
 Company-owned machinery was used in the construction of the plant for 3 months during the
year. The depreciation of the machinery amounted to C260 000 for the entire year ended 30
June 20X3.
 Labour costs incurred for the year (to 30 June 20X3) was C390 000.
- 80% thereof was incurred on building roads
- 20% therefore was incurred in constructing the plant.
There was a labour strike while constructing the plant, during which labourers did not pitch for work,
but were paid. Roughly 5% of the labour costs referred to above reflected labour costs during which
no construction took place.
 The plant was first brought into use on a contract that started on 1 May 20X3, although it was
available for use from April 20X3.
 The plant is to be depreciated using the straight- line method over its expected useful life of 5
years and is expected to be sold for C65 000 at the end of its 5-year life. A similar plant, which
had Already been used for 5years, recently realised C9 100.
REQUIRED Marks
A 15
Critically analyse each of the above issues, explain whether the accounting
treatment is correct or incorrect and justify your advise with reference to
International Financial reporting standards.Your answer must be broken down
into four separate discussions under the headings given in the question.

Suggested Solution
a) Journals
Debit Credit
Year ended 30 June 20X3:
1 August 20X2
Raw materials (A) Given 650 000

Bank/ liability 650 000
Purchase of raw materials
31 December 20X2
Plant: cost (A) Given 130 000

Raw materials (A) 130 000
Raw materials used in the construction of the asphalt mixing plant
31 March 20X3
Plant: cost (A) Given 26 000

Bank/ liability 26 000
Safety test performed before plant could be brought into use
30 June 20X3
Depreciation: machinery (E) Given 260 000

Machinery: accumulated depreciation: (-A) 260 000
Depreciation of machinery
Plant: cost (A) 260 000 x 3/12 65 000

Depreciation: machinery (E) 65 000
Allocation of 25% of the depreciation on machinery to the construction of
the asphalt mixing plant
Labour costs (E) Given 390 000

Bank 390 000
Labour costs incurred during the year (these journals would obviously
have been journalised as incurred rather than as one single journal entry)
Plant: cost (A) 390 000 x 20% x 95% 74 100

Labour costs (E) 74 100
Allocation of 20% of labour costs (excluding 5% unnecessary wastage due to
strike) to construction of asphalt mixing plant
Depreciation: plant (E) (130 000 + 26 000 + 14 300

65 000 + 74 100 – 9 100) / 14 300
Plant: accumulated depreciation (-A) 5 years x 3/12
Asphalt mixing plant depreciated since first available for use

b) Disclosure
4 Property, plant and equipment

20X3
Total net carrying amount: C
Other assets xxx
Plant 280 800
xxx
Asphalt mixing plant – self constructed asset

Net carrying amount: 1 July 20X2 0
Gross carrying amount 0
Accumulated depreciation and impairment losses 0
Additions (130 000 + 26 000 + 65 000 + 74 100) 295 100

Depreciation (295 100 – 9 100) / 5 years x 3/12 (14 300)
Net carrying amount: 30 June 20X3 280 800

Gross carrying amount 295 100
Accumulated depreciation and impairment losses (14 300)
5 Profit before taxation
Profit before taxation is stated after taking into account the following separately disclosable items:
20X2
C
Depreciation – machinery Balancing 195 000
Total depreciation on machinery Given 260 000
Less capitalised to asphalt mixing plant 260 000 x 3/12 (65 000)
Depreciation – asphalt mixing plant Above 14 300

MARY INDIVIDUAL
Mary is quite a contrary lady.Although this does not usually interfere with her daily life, recent
events have thrown her into panic –IAS 16 gives Mary a choice! As you can imagine, Mary is totally
confused as to whether to use the gross replacement value method or the net replacement value
method. When you last saw Mary she was sitting, talking to herself and discussing, in great depth
and with tremendous animation, which method should be used. You found the following
information scribbled on a piece of paper on Mary’s desk:
Plant purchased on 1/1 20X1at cost: C100 000
Depreciation: 20% straight-line per annum to a nil residual value
Fair value at 1/1 20X2: C90 000
The revaluation surplus is transferred to retained earnings over the life of the asset.
In an attempt to return Mary to a calmer version of herself , you decided to prepare the journals
using the information in the note, using both the net replacement value methods and the gross
replacement value method.
REQUIRED Marks
1. Show the journals for the years ended 31 December 20X1 and 20X2 using: 12
a) net replacement value method (NRVM)

b) gross replacement value method (GRVM)

Suggested Solution
Journals NRVM GRVM
1/1/20X1 Dr/(Cr) Dr/(Cr)
Plant: cost (A) 100 000 100 000
Bank/ Liability (100 000) (100 000)
Purchase of asset
31/12/20X1
Depreciation (E) 100 000 / 5 years remaining 20 000 20 000
Plant: accumulated depreciation and impairment losses (-A) (20 000) (20 000)
Depreciation of plant
1/1/20X2: revaluation (increase)
Plant: accumulated depreciation and impairment losses (-A) 20 000 N/A
Plant: cost (A) (20 000) N/A
NRVM: set-off of acc. depreciation before revaluing asset
Plant: cost (A) W2 10 000 N/A
Revaluation surplus (OCI) (10 000) N/A
NRVM: Revaluation journal – cost account now reflects fair value
Plant: cost (A) 112 500 (W3) - 100 000 N/A 12 500
Plant: acc depr and imp losses (-A) 22 500 (W3) - 20 000 N/A (2 500)
Revaluation surplus (OCI) 90 000 - 80 000 or Balancing N/A (10 000)
GRVM: revaluation of asset
31/12/20X2: depreciation and transfer of revaluation surplus

Depreciation (E) 90 000 / 4 years remaining 22 500 22 500
Plant: acc depr and imp losses (-A) (22 500) (22 500)
Depreciation: new CA over remaining useful life
Revaluation surplus (OCI) 10 000 / 4 years remaining or 2 500 2 500
Retained earnings (Eq) 22 500 revalued depr – 20 000 (2 500) (2 500)
historic depr
Transfer of revaluation surplus to retained earnings over life of asset
(the extra depreciation for 20X2 due to the revaluation above HCA)
WORKINGS: applicable to both (A) and (B)
W1: Actual (and historic) carrying amount 1/1/20X2: C
Cost: 1/1/20X1 Given 100 000

Accumulated depreciation: 31/1/20X1 (100 000 x 20% x 1 yr) (20 000)
80 000
W2: Revaluation required at 1/1/20X2:
Fair value Given 90 000

Actual carrying amount (W1) (80 000)
10 000

W3: For GRVM only:
Gross replacement value (GRV): 1/1/20X1 90 000 / 4 years remaining x 5 total years 112 500
Acc depreciation on GRV: 31/12/20X1 112 500 / 5 total years x 1 year to date (22 500)
Fair value: 1/1/20X2 Given 90 000

PEASY LIMITED
Part A:
Peasy Limited purchased a special item of plant, details of which are as follows:
Cost (purchased on credit) C600 000
Date of purchase 1 January 20X4
Useful life 5 years
Residual value Nil
Depreciation method Straight-line
Peasy Limited measures plant under the revaluation model. The following fair values were
calculated for this item of plant:
I January 20X6 C528 000
I January 20X7 C440 000
Peasy Limited transfers the maximum amount from the realised portion of the revaluation surplus
to retained earnings over the useful life of the plant.
REQUIRED Marks
1. Prepare the journals for the plant for the year ended 31 December 20X4 to 20X7 12
assuming:
a) The gross replacement value method is used; and

b) The net replacement value method is used.

Suggested Solution
Part A: Journals
Part (a) Part (b)

GRVM NRVM
1/1/20X4 Dr/ (Cr) Dr/ (Cr)
Plant: cost (A) 660 000 660 000

Liability (660 000) (660 000)
Purchase of asset
31/12/20X4
Depreciation: plant (E) (660 000 – 0) / 5 years x 1 132 000 132 000
Plant: acc depr & imp Loss (-A) (132 000) (132 000)
Depreciation on plant
31/12/20X5
Depreciation: plant (E) (660 000 – 0) / 5 years x 1 132 000 132 000
Plant: acc depr & imp loss (-A) (132 000) (132 000)
Depreciation on plant
Plant: cost (A) Cost acc: Cost now 880 000 (See W2 under 220 000 N/A
‘Workings for (a)’) – Cost was: 660 000
Plant: acc depr & imp loss (-A) AD acc: AD now 352 000 (See W2 under (88 000) N/A
‘Workings for (a)’) – AD was: 264 000
Revaluation surplus (OCI) FV: 528 000 – CA: 396 000; or (132 000) N/A
Balancing
Plant: acc depr & imp loss (-A) NRVM: 132 000 + 132 000 N/A 264 000
Plant: cost N/A (264 000)
NRVM: set-off of accumulated depreciation before revaluing asset
Plant: cost (A) FV: 528 000 - CA: 396 000* N/A 132 000
Revaluation surplus (OCI) *Where CA = N/A (132 000)
Cost 660 000 – AD: 264 000 = 396 000
NRVM: revaluation of asset

Depreciation: plant (E) (FV:528 000 – 0) / 3 years rem x 1 yr 176 000 176 000
Revaluation surplus (OCI) 132 000 / 3 years remaining x 1 44 000 44 000

Retained earnings (Eq) (44 000) (44 000)
Transfer of revaluation surplus to retained earnings: over life of asset
(the extra depreciation for 20X6 due to the revaluation above HCA =
176 000 revalued depreciation – 132 000 historic depreciation)

Journals continued … Part (a) Part (b)
GRVM NRVM
Plant: cost (A) Cost acc: 220 000 N/A

Cost now 1 100 000 (See W2 under
‘Workings for (a)’) – Cost was 880 000
Plant: acc depr & imp loss (-A) AD acc: (132 000) N/A
AD now 660 000 (See W2 under
‘Workings for (a)’) – AD was 528 000*
*Where ‘AD was’ =
132 000 x 2yrs + 88 000 adj + 176 000
= 528 000
Revaluation surplus (OCI) FV: 440 000 – CA: 352 000; or (88 000) N/A
Balancing
Plant: acc depr & imp loss (-A) N/A 176 000
Plant: cost (A) N/A (176 000)
NRVM: set-off of accumulated depreciation before revaluing asset
Plant: cost (A) FV: 440 000 - CA: 352 000* N/A 88 000
Revaluation surplus (OCI) *Where CA = N/A (88 000)
FV 528 000 – AD: 176 000 = 352 000
NRVM: revaluation of asset

Depreciation: plant (E) (FV 440 000 – 0) / 2 years rem x 1 yr 220 000 220 000
Revaluation surplus (OCI) RS bal: 176 000* / 2 years remaining 88 000 88 000
Retained earnings (Eq) *Where RS bal = (88 000) (88 000)
132 000 – 44 000 + 88 000 = 176 000
Transfer of revaluation surplus to retained earnings: over life of asset (the
extra depreciation for 20X7 due to the revaluation above HCA =
220 000 revalued depreciation – 132 000 historic depreciation)
WORKINGS for (a): GRVM
W1: The gross replacement values are as follows:
1/1/20X6: FV: 528 000 / 3 years remaining x 5 total years = 880 000
1/1/20X7: FV: 440 000 / 2 years remaining x 5 total years = 1 100 000
W2: Revised balances will be: After the After the

Revaluation on Revaluation on
1/1/20X6 1/1/20X7
Cost account GRV (calculated above) 880 000 1 100 000
Acc deprec account Balancing (352 000) (660 000)
Carrying amount Fair value (given) 528 000 440 000

WORKINGS for (b): NRVM
W1: Revised balances will be: After the After the

Revaluation on Revaluation on
1/1/20X6 1/1/20X7
Cost account Fair value (given) 528 000 440 000
Acc deprec account Netted off against cost (0) (0)
Carrying amount Fair value (given) 528 000 440 000

ORBISON LIMITED
Orbison Limited constructed a new factory plant during 20X6:
Costs (C) Notes
Raw materials: 960 000 (1)
Labour payments: 800 000 (2)
Specialised platform: 1 200 000 (3)
Safety inspection: 960 000 (4)
Official opening ceremony: 160 000 (5)
Replacement engine 176 000 (6)
Maintenance 384 000 (7)
Notes:
(1) This includes materials of C320 000 that were purchased from an internal division (the C320 000
included a 25% mark-up on cost).
(2) The payments were made to the labourers after deducting the following:
 employee contributions to provident funds and medical aids: C480 000; and
 employee’s tax: C320 000
Orbison Limited also contributes to the above mentioned funds by matching the amount of the
employee contributions.
(3) The specialised platform was a necessary part of the factory plant. The platform was built by
subcontractors and will be depreciated at 10% per annum to a residual value of C80 000.
(4) The safety inspection is legal requirement before commissioning the plant. This first inspection
was performed on 27 May 20 X6 and repeat inspections must occur every three years.
(5) A ceremony to officially open the plant took place on 31 May 20X6. It was attended by all
employees as well as the local mayor and other dignitaries.
(6) On 22 December 20X6, one of the main engines failed. There was no way of repairing it and thus
it was scrapped. This engine had not been accounted for as a separate part, but it was estimated
that its original cost was C160 000 (material). The replacement engine was acquired and
installed on 30 December 20X6 (cost: C176 000) and will be depreciated to a nil residual value
over a slightly shorter useful life of 2 years.
(7) The maintenance costs refers to the necessary regular weekly servicing of the plant.

It is expected that the plant will have a nil residual value and a useful life of 20 years (the specialised
platform will need to be replaced half way through this period). The straight-line methods is
considered to be the most appropriate for the plant. At the end of this 20-year period, the plant will
need to be dismantled. The future dismantling cost is expected to be C4 800 000. An appropriate
discount rate is 10% per annum.
The plant was available for use on 31 May 20X6, but was only brought into use on 2 July 20X6.
REQUIRED Marks
1. 10
Calculate the carrying amount of the plant in Orbison Limited’s statement of
financial position as at 31 December 20X6, in accordance with International
Financial Reporting Standards.

Suggested Solution
Answer:
The carrying amount of plant at 31/12/20X6: C5 510 546 (W1)
WORKINGS
W1. Carrying amount of plant
W1.1 Basic plant (excluding platform and inspection costs and replacement engine)
Raw materials (960 000 – 320 000) + 320 000 / 125% x 100% 896 000
Labour 800 000 + 480 000 + 320 000 + 480 000 (co. contrib.) 2 080 000
Provision for dismantling W2 713 489
3 689 489
Less Depreciation of basic plant (3 689 489 – 0) / 20 years x 7 / 12 (107 610)
Less Impairment of engine Cost: 160 000 – AD: (160 000 – 0)/ 20 years x 7/12 (155 333)
– Recoverable amt: 0 (scrapped)
Carrying amount: 31/12/20X6 3 426 546
W1.2 Engine replacement A separate part since the useful life now differs
Cost Given 176 000
Less Depreciation of new No depreciation yet (0)
engine
Carrying amount: 31/12/20X6 176 000
W1.3 Specialised platform

Cost Given 1 200 000
Less Depreciation of platform (1 200 000 – 80 000 ) x 10%p x 7 / 12 (65 333)
Carrying amount: 31/12/20X6 1 134 667
W1.4 Major inspection

Cost Given 960 000
Less Depreciation of inspection (960 000 – 0) / 3 years x 7 / 12 (186 667)
Carrying amount: 31/12/20X6 773 333
W1.5 Carrying amount in total

Carrying amount of plant: 31/12/20X6 3 426 546 + 176 000 + 1 134 667 + 773 333 5 510 546
Comment:
The launch party costs are not capitalised to the plant since these costs are not directly attributable to
bringing the plant to a location and condition to enable its use as intended by management. Further,
these costs are not recognised as an asset as the future economic benefits from the launch party are not
probable. Therefore, these costs are expensed as they are an outflow of economic benefits during the
period.
W2: Provision for
dismantling Financial
calculator
n = 20 years

i = 10% per
annum FV = -4
800 000
Solve for PV = 713
489 Or
Present value formula

FV = PV(1 + i)n
4 800 000 = PV(1 + 10%)20
PV = 713 489

LESUTHU FISHERIES
Lesutu Fisheries is a company that fishes in the Katse Dam and sells the fish to the public via a retail
outlet in a nearby village. Lesutu Fisheries has two small boats that were purchased for a total
amount of C30 000 (C15 000 per boat) on 1 January 20X0.
The cost of transporting the boats to the dam was C7 000 (in total), and the cost of varnishing the
boats with marine varnish (to protect against rotting in the water) was C13 000 (in total). In order
to improve the company image, the board of directors decided to pain the boats in its company
colours of yellow and blue. This was done immediately after applying the protective varnish at a
total cost of C10 000.
The company uses the cost model to measure its assets. The boat was depreciated over their
estimated economic useful life of 3 years on the straight-line basis. The current selling price of
similar boats in the same condition expected of the boats after 3 years is C5 000 (C2 500 per boat),
before taking into account the estimated cost of delivery of the boats to the purchaser of C3 000
(C1 500 per boat).
At 30 June 20X0, the financial year-end of Lesutu Fisheries, the boats collided with each other in the
dam. The fair value per boat dropped to C7 000 as a result, before taking into account expected
selling cost of C4 000 per boat. The accountant is reluctant to make any adjustments since the most
recent management approved budgets reflects a relatively C30 000 from the use of the two
damaged boats (C15 000 per boat) and an estimated net present value of the net proceeds from the
sale of the two damaged boats at the end of their useful life of C2 000 (C1 000 per boat).
Lesuru Fisheries received an insurance pay-out on 3 July 20X0 of C 25 000 (C12 500 per boat). The
two damaged boats were traded in for two new boats valued at C33 000 (C16 500 per boat) on 4
July 20X0. The trade-in value received for the two damaged boats was C9 000 (C4 500 per boat) and
the balance owing was paid by cheque. The two new boats are to be depreciated at 20% per annum
on the straight-line method to a zero residual value.
REQUIRED Marks
1. 25
a) Calculate the total amount at which the original boats should initially be
measured.
b) Calculate the recoverable amount and the impairment loss, if applicable, at
30 June 20X0.
c) Journalise all transactions affecting the fleet of boats up to the year ended
30 June 20X1.

Suggested Solution
a) Initial measurement
Purchase price 30 000

Transport 7 000
Protective varnish 13 000
50 000
The painting of the boats in the company colours is regarded as advertising and does not meet the
recognition criteria of an asset as the inflow of benefits cannot be regarded as probable.
b) Recoverable amount and impairment loss
Depreciable amount
Cost Above 50 000
Residual value 5 000 – 3 000 (2 000)
48 000
Carrying amount (30/6/20X0)
Cost 50 000
Accumulated depreciation 48 000 / 3 x 6/12 (8 000)
42 000
Fair value less costs of disposal (30/6/20X0)
Fair vale 7 000 x 2 boats 14 000
Costs of disposal 4 000 x 2 boats (8 000)
6 000
Value in use (30/6/20X0)
NPV of usage Given 30 000
NPV of residual amount Given 2 000
32 000
Recoverable amount (30/6/20X0)
Higher of fair value less costs of disposal: 6 000 and value in use: 32 000 32 000
Impairment loss (30/6/20X0)

Carrying amount 42 000
Recoverable amount (32 000)
10 000
c) Journals – 20X0
01 Jan X0 Debit Credit

Boats: cost (A) 30 000
Bank/ Accounts payable 30 000
Purchase of boats

Unavoidable costs of transport

Unavoidable costs of varnish
Advertising (E) 10 000

Painting of boats in company colours
Debit Credit
30 June X0
Depreciation: boats (E) 8 000
Boats: accumulated depreciation (-A) 8 000
Depreciation of boats
Impairment loss: boats (E) 10 000

Boats: accumulated depreciation & impairment losses (-A) 10 000
Impairment of boats following the accident
Journals – 20X1
03 July X0
Bank (A) 25 000
Insurance proceeds (I) 25 000
Receipt of insurance proceeds

Boats: cost (old) (A) 50 000
Boats: cost (new) (A) 33 000
Bank 33 000 – 9 000 24 000
Loss on trade-in (50 000 – 18 000) – 9 000 23 000
Trade-in of damaged boats for new boats
30 June X1
Depreciation: boats (E) 33 000 x 20% 6 600
Depreciation of new boats

DEMBELE LIMITED
Dembele Pvt Ltd, hereon referred to as “Dembele” is a reputable manufacturer of Brazilian weaves
and operates from its main factory situated in Willowvale. Its products are distributed to the various
salons and stores throughout the region. Dembele complies with International Financial Reporting
Standards and their year-end is 31 December.
Willowvale Factory Building
Dembele purchased its current factory building from an unnamed third party for $10 million on 1
January 2009, the building had no roof (was incomplete) on the date of purchase. The consideration
was to be paid in two installments; the first one ($5 million) on 1 January 2009 and the second
installment on 31 December 2009. The factory building’s floors with a carrying amount of $ 1.3
million had to be removed as they were wooden and were replaced with tiles at a cost of $1.8 million
on 31 January 2009. In addition to this, $2 million was spent on roofing the factory building. The
roofing activities commenced on 15 January 2009 and were completed on 28 February 2009. The
roof was financed through an overdraft of $2 million from CBA bank approved on 1 January 2009
and ceased on 30 April 2009.
Architect and project manager’s fee of $50 000 were incurred on the roofing. The factory building
was brought into use on 1 March 2009. Dembele estimated that the total economic life and the total
useful life of the factory building to be 40 and 30 years respectively. The residual value was
estimated to be $1 million. Following the recent ‘Clean up Zimbabwe Campaign’ the government
required companies in the hair production industry to dismantle their operations and relocate to a
different designated area at the end of the useful life of the asset. The fair value of the dismantling
costs was estimated to be $420000.
For the 2009 and 2010 financial years, management re-assessed their estimates of the economic
life, useful life, residual value and costs of disposal, and no changes therein were necessary.
On 1 January 2011, the recoverable amount of the factory building on that date was determined as
$9.5 million. At the same date, the company also re-assessed its estimate of the economic life, the
useful life, the residual value and the costs of disposal. The remaining economic and useful life
remained unchanged, but the residual value increased to $1.5 million. The estimated costs of
disposal remained unchanged.
Acquisition of a fleet of delivery vehicles

During the 2009 financial year, Dembele decided to acquire its own fleet of delivery vehicles, due to
the increase in fees charged by the previous courier. Dembele intended to only use the vehicles for
9 months and took out a put option to sell the vehicles to Mnandi Motors for $9 million on 31
December 2009.
On 1 April 2009, Dembele purchased a new fleet of delivery vehicles at a total cost price of $11.5
million. The Finance Manager is uncertain as to how the truck fleet should be classified in the
statement of financial position and seeks your advice in this regard.
Additional information
 Dembele uses the cost model as per IAS 16
 The interest rate chargeable on the overdraft facility was 12%
 Assume a nominal post-tax discount rate of 7.43% per annum.
 Ignore VAT and Tax
REQUIRED Marks
1. 35
A. Provide all the necessary journal entries processed in the accounting

records of Dembele Pvt Ltd for the years ended 31 December 2009 and
31 December 2011
B. With regards to the acquisition of the fleet of delivery vehicles, advise
the Finance Manager on the appropriate classification of the truck fleet
in Dembele’s statement of financial position on 31 December 2009.
C. Assume the Post tax discount rate was revised to 9.65% discuss the
impact of this on the Statement of Financial Position

Suggested Solution
a)
Journal entries:
2009
Dr Factory Building (P/L) 10 000 000 (0.5)
Cr Bank (SFP) 5 000 000 (0.5)
Cr Trade Payables (SFP) 5 000 000 (0.5)
Initial recognition of purchase
Dr Trade Payables (SFP) 5 000 000 (0.5)
Cr Bank (SFP) 5 000 000 (0.5)

Settlement of outstanding balance on Factory building (no need to take into account the time value
of money as the liability was settled within 12 months)
Dr Factory Building: New Floor (SFP) 1 800 000 (0.5)
Cr Factory building: Old Floor (SFP) 1 300 000 (0.5)
Dr Loss on Derecognition (P&L) 1 300 000 (0.5)
Cr Bank (SFP) 1 800 000 (0.5)
Derecognition of old floor and capitalization of new floor to the factory building
Dr Factory Building (SFP) 2 000 000 (0.5)
Cr Bank/Overdraft Facility (SFP) 2 000 000 (0.5)
Capitalisation of the roofing costs to the factory building
Dr Interest Expense (P/L) 80 000 (0.5)
Cr Bank/Interest payable 80 000 (0.5)
Period is less than a year therefore we don’t capitalize interest (4)
However, students who capitalized borrowing costs after apportioning were not penalised
Expensing of interest on overdraft
Dr Overdraft Liability (SFP) 2 000 000 (0.5)

Cr Bank (SFP) 2 000 000 (0.5)
Repayment of overdraft facility
Dr Factory Building (SFP) 50 000 (0.5)
Cr Bank (SFP) 50 000 (0.5)
Capitalising of Architect’s fees
Dr Factory Building (SFP) 420 000 (0.5)
Cr Provision for Dismantling Costs (SFP) 420 000 (0.5)
Capitalising of dismantling costs. There was no need to present value them as the PV was the fair
value
Dr Depreciation Expense (P/L) 332 500 (0.5)
Cr Acc Depreciation (SFP) 332 500 (0.5)
Cost= 10000-1300+1800+2000+50+420=12970 therefore Depn = (12970-1000)/30*10/12

(4.5)
Recognition of depreciation for 2009
Dr Finance Costs (P/L) 35 000 (0.5)
Cr Provision for Dismantling (SFP) 35 000 (0.5)
N= 30 I= 7.43/(1-0.2575) PV= 420 000 FV= Solve and find interest expense using calculator
(2)
10 months of interest so apportion 42000*10/12
Recognition of the increase in the provision
Dr Motor vehicles (Current Assets) (SFP) 11 500 000 (0.5)
Cr Bank (SFP) 11 500 000 (0.5)
Acquisition of vehicles
Dr Bank (SFP) 9 000 000 (0.5)
Dr Loss on disposal (P&L) 2 500 000 (0.5)

Cr Motor Vehicles (SFP) 11 500 000 (0.5)
Disposal of Motor vehicles
2010 ( Not required)
Dr Depreciation Expense (P/L) 399 000 (0)
Cr Acc Depreciation (SFP) 399 000 (0)
Recognition of depreciation for 2010
Dr Finance Costs (P/L) 45 500 (0)
Cr Provision for Dismantling (SFP) 45 500 (0)
(420000+35000)*10%
2011
Carrying amount= 13000-332.5-399=12238.5 (1)
Recoverable amount= 9500 (0)
Impairment= 12200-9500= 2738.5 (1)
Dr Impairment Expense (P/L) 2 738 500 (0.5)
Cr Acc Impairment Loss (SFP) 2 738 500 (0.5)
Recognition of the impairment on the factory building
Dr Depreciation Expense (P/L) 284024 (0.5)
Cr Acc Depreciation (SFP) 284024 (0.5)
= (9500-1500)/28years and 2 months (2.5)
Recognition of depreciation on the new carrying amount of the factory building. The residual value
has changed and the remaining useful life is 28 years and 2 months
Dr Finance Costs (P/L) 55 055 (0.5)
Cr Provision for Dismantling (SFP) 55 055 (0.5)

(420000+35000+45500+50050)*10% (2)
Presentation: General (1)
Using narrations (1)
(34.5)

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CHARTERED ACCOUNTANTS ACADEMY

FINANCIAL ACCOUNTING & REPORTING DEPARTMENT

CERTIFICATE OF THEORY IN ACCOUNTING

IAS 16 PROPERTY, PLANT & EQUIPMENT

Page 1 of 31 ©Chartered Accountants Academy 2019

EXTRACT FROM TRIAL BALANCE AT 30 JUNE 20X4

Land (Plot 20 Melrose Estate) acquired 1/1/20X2, at cost 80 000

Office buildings available for use on 30/6/20X4, at cost 50 000

Fixtures and fittings, at cost 60 000

Accumulated depreciation of fixtures and fittings at 10 000

 No depreciation is calculated on land.

 Building are depreciated at 2% per annum on the straight line basis.

Page 2 of 31 ©Chartered Accountants Academy 2019

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 20X4

1 Statement of compliance (not required)

2 Basis of preparation (not required)

3. Significant accounting policies

3.1 Property, plant and equipment

10. Property, plant and equipment

Page 3 of 31 ©Chartered Accountants Academy 2019

Balance 1/7/20X3 80 000 - 60 000 140 000

Constructed - 50 000 50 000

Balance 30/6/20X4 80 000 50 000 60 000 190 000

Balance 1/7/20X3 - - 10 000 10 000

Current depreciation - -** 5 000* 5 000

Balance 30/6/20X4 - - 15 000 15 000

1/7/20X3 80 000 - 50 000 130 000

30/6/20X4 80 000 50 000 45 000 175 000

* Calculation of current depreciation: (60 000 – 10 000) x 10% = 5 000

Page 4 of 31 ©Chartered Accountants Academy 2019

Issue a) Internal manufacture of machine B

Included in non-current assets in Yoyo Limited’s statement of financial position at 31 December

 Depreciation of other materials used in the manufacture of machine B : C80000.

 Labour cost of C100 000.

 Admissions overheads of C70 000.

Issue b) Acquisition of a Crane

Issue c) Repaining of factory building

Issue d) Replacing interior walls

Page 5 of 31 ©Chartered Accountants Academy 2019

Page 6 of 31 ©Chartered Accountants Academy 2019

The capitalisation of the other costs is correct on the grounds that:

Issue b) Acquisition of a crane

Issue c) Repainting of the administration building.

Page 7 of 31 ©Chartered Accountants Academy 2019

The cost of the item can be measured reliably. IAS 16.7(b)

Issue d) Replacing the interior walls

Page 8 of 31 ©Chartered Accountants Academy 2019

- 80% thereof was incurred on building roads

- 20% therefore was incurred in constructing the plant.

Page 9 of 31 ©Chartered Accountants Academy 2019

Raw materials (A) Given 650 000

Plant: cost (A) Given 130 000

Plant: cost (A) Given 26 000

Depreciation: machinery (E) Given 260 000

Plant: cost (A) 260 000 x 3/12 65 000

Labour costs (E) Given 390 000

Plant: cost (A) 390 000 x 20% x 95% 74 100

Depreciation: plant (E) (130 000 + 26 000 + 14 300

Page 10 of 31 ©Chartered Accountants Academy 2019

4 Property, plant and equipment

Asphalt mixing plant – self constructed asset