PABLO TUTORIALS

QUESTION :1
A machine was purchased on 30 June 20x0 and was expected to be used for 4 years and
have no residual value. The original cost of the machine was R500 000.

A further amount of R200 000 was spent on the machine on 31 December 20x1 to convert the
machine from a battery-powered machine to an electricity-powered machine following the
installation of electricity to the area where the factory was situated. This did not extend the
machine’s useful life, but the output increased due to the change. The machine functioned
well for about 18 months but has not functioned well in the last 6 months of 20x2.

At the end of the year, it was functioning at only about 40% of its capacity and as a result,
management considered that the asset might be impaired. They have determined that they
would receive R75 000 if they sold the machine; and that the present value of future net cash
flows that will be generated by the machine is R300 000. (All amounts relating to the machine
are exclusive of VAT.)

YOU ARE REQUIRED TO:

1 Discuss whether the R200 000 expenditure in January 20x1 should have been
expensed or capitalized when it was incurred. (3 marks)

2 Discuss the basis of calculating the carrying amount on the statement of financial
position at 31 December 20x2. (4 marks)

3 Based on the conclusions that you reached in 2 above, prepare the journal entries for
the machine in 20x1 and 20x2. Closing entries are not required. (6 marks)

4 Show how machinery should be disclosed in the Statements of Financial Position for
the years ended 31 December 20x1 and 20x2. (16 marks)

Question 2

West Gate limited owns two buildings:

 A head office building located in Sibasa; and

 Another office block located in Thohoyandou.
The office building located in Sibasa is used as West gate Limited’s head office. Dineo
floods, on 30 June 2016, completely destroyed this building. The building in Sibasa was
purchased on 1 January 2016 for R2 000 000. The building has a total useful life of 10 years
and a residual value of nil.
The property in Thohoyandou was leased under an operating lease to a tenant Agape
Accountants. After the floods, West Gate Limited urgently needed new premises for its head
office. Since Agape Accountants was always late in paying their lease rentals, West Gate
Limited decided to evict them and move its head office to this building in Thohoyandou. This
eviction and relocation was effective from 1 July 2016.
  The building in Thohoyandou was purchased on 1 January 2016 for R500 000.
 On 30 June 2016, the fair value of the building in Thohoyandou was R950 000
 There was no change in fair value at 31 December 2016.
 The total useful life was estimated to be 10 years from the date of purchase and the
residual value was estimated to be nil.
West gate Limited uses:

 The cost model to measure its property, plant and equipment and
 The fair value model for its investment properties.

Required:
1. Journalize the above transactions in the books of West Gate Limited for the year
ended 31 December 2016. (16 marks)

2. Disclosure in the financial statements of West Gate Limited for the year ended 31
December 2016 so as to comply with IFRS. (5 marks)