You have just been given the fixed assets section from the audit file of WELLER Limited

(WELLER) in relation to the financial statements for the year ended 31 December 2008 with a note from the partner-in-charge asking you to clear the outstanding review points.

Review point 1 WELLER owns two freehold properties, one in Derry and the other in Cork. The company uses both as regional administrative offices. The properties had an expected useful life of 50 years on their date of acquisition, and the directors believe that this assumption is still appropriate at 31 December 2008. It is company policy to depreciate the properties on a straight-line basis over their estimated useful economic life.

out period together with the cost of the fixtures and fittings.
Is the policy put forward by the directors of WELLER acceptable?
Review point 4 TAYLOR Limited (TAYLOR) is also an audit client of your firm. The company operates in the same business as WELLER and is similar in size. Both companies purchased identical equipment from the same supplier on 1 January 2007 at a cost of €6,000,000. Shown below are extracts from the fixed assets notes of both companies in respect of this equipment.

Are there valid reasons for the policy of non-depreciation of freehold land?
Requirement Prepare a memorandum addressed to the partner-in-charge of the audit of WELLER addressing the issues raised in each of the review points.

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Date of acquisition Original cost Net book value at 31 December 2008 Market value at 31 December 2008 Derry property 1 January 1999 5,000,000 Cork property 1 January 1999 5,000,000 4,000,000 3,000,000 4,000,000 7,000,000 In the financial statements for the year ended 31 December 2008, the directors of WELLER are proposing to show the Cork property at market value and the Derry prop- erty at its depreciated historic cost. The directors believe the fall in the market value of the Derry property is only temporary and property values in the Derry area will rise in the next one to two years. Is the policy put forward by the directors of WELLER acceptable? Review point 2 On 1 January 2008, WELLER entered into a contract with a building company to build a new manufacturing facility for the company at a cost of 10,000,000. In order to finance the cost of the contract, WELLER entered into a short-term loan agreement with its bankers to borrow 10,000,000 at an interest rate of 6% per annum for the year that the manufacturing facility would take to build. The manufacturing facility was completed on 31 December 2008 and the loan was repaid on the same date. As WELLER's profits for the year ended 31 December 2008 are lower than expected, the directors of WELLER wish to capitalise the loan interest paid. Is the policy put forward by the directors of WELLER acceptable? Review point 3 On 1 July 2008, WELLER signed, as tenant, an operating lease of a warehouse which it intends to use as a distribution depor. However the warehouse needed to be fitted out before it could be used. The monthly rental for the warehouse is 10,000, commencing on 1 July 2008. The fitting was completed on 1 December 2008 and the warehouse became operational on this date.