Ignore taxation.
CottonOff Ltd (‘CO’) is a well-established retail company with a focus on providing fashion clothing and stationery brands. CO is known for putting their own twist on current trends to allow customers to have fun with their individual style. They provide the hottest trends with the aim to make the customer not only look good but also feel good. CO consists of stand-alone stores (mostly in malls) as well as anonline platform to sell its products. CO have a 31 December year-end. You are the senior accountant at CO and are in the process of finalising the financial statements. You were provided with the following information:
Factory building in Mahikeng
On 1 April 2018, CO started with the construction of its factory building and started incurring construction costs. The building is a qualifying asset in terms if IAS 23 Borrowing Costs. CO had to 7/8 borrow R1 800 000 from Kapitek Bank and received the loan on 1 January 2018 in order to construct the building. The interest rate applicable to the loan was 9% per year, compounded annually. CO paid construction costs of R1 800 000 evenly between 1 April 2018 and 30 September 2018. Surplus funds were invested in a fixed deposit that earned 7% per annum. CO repaid the loan on 1 October 2018, the same date that the factory building was substantially complete. It was however only available for use on 1 November 2018 due to a few last remaining small finishing touches that needed to be made. The total useful life of the building is 20 years with a residual value of R500 000. The fair value of the building was similar to the carrying amount on 31 December 2018 and the fair value of the building amounted to R2 100 000 on 31 December 2019. As the Covid-pandemic also had an impact on Mahikeng and its economy, the net replacement value of the building, as obtained from the expert valuator, Miss Price, amounted to R1 480 000 at 31 December 2020.
Building in Vanderbijl park CO purchased another building on 1 October 2020 for R4 000 000. It consists of four floors of which three will be rented out. 

These floors can be sold separately. The first floor will be used as offices of CO. On this date it was unclear if the fair value of the building would be reliably measurable on a continuing basis. CO is going to convert the garden into a parking lot. According to the purchase agreement they will have to remove the parking lot and rehabilitate the garden at the end of the building’s useful life of 20 years. The estimated amount that will be paid to rehabilitate the garden at the end of 20 years amounts to R800 000. The building was available for use on purchase date. On 31 December 2020 the fair value of the building including a provision for rehabilitation became reliably measurable at an amount of R3 200 000. The residual value of the building amounts to R400 000.

Machinery
Due to the pandemic that also had an impact on the clothing industry, CO decided to start focusing on informal ‘at home’ work clothes instead of its formal professional work clothes. The decision was made on 1 May 2020 to exchange the satin embroidery machine with a carrying value of R205 000 (initial cost on 1 May 2019 amounted to R256 250) for a garment printing machine from Jett Ltd (‘Jett’) with a fair value of R320 000. The fair value of the satin embroidery machine on the same date was R200000. CO had to pay the transport cost to get the new machine to its premises as well as to deliver the satin embroidery machine to Jett’s factory. The total transport cost for these two machines amounted to R15 000 (50% split when allocating to transport of each machine) and was paid on 2 May 2020.
Machinery is depreciated over five years to an insignificant residual value. The exchange transaction did have commercial substance. CO had no other machinery other than what is evident from this discussion.
Delivery van
CO purchased a delivery van on 1 August 2019 for R300 000 to assist with the transport of its
employees. CO incurred costs of R4 000 to paint the CO logo on its doors. CO also agreed to pay for all
cost of the driver to obtain his driver’s licence to be able to transport people. This amounted to R1 000
in total. All these amounts were paid in cash on 1 August 2019. The total useful life of the van is five
years with an insignificant residual value. The van was involved in a minor accident in Potchefstroom
during December 2019 when the driver accidently bumped into another car as the driver was using his
cell phone while driving. No one was injured but the bumper and some paint was damaged. CO has not
yet repaired the bumper or resprayed the paint as the van can still operate without being repaired.
The accident did not affect the useful life of the van. The recoverable amount of the delivery van
amounted to R250 000 on 31 December 2019.

8/8

As online sales increased during the 2020 lockdown period, the interest in second hand delivery vans
increased as well, therefore the value of the van increased and the following values were determined
as at 31 December 2020: value in use of R196 000, fair value of R227 000 and expected selling costs of
R7 000.
Accounting policies and other information
• CO accounts for owner-occupied land and buildings on the revaluation model in terms of IAS 16
Property, Plant and Equipment, with revaluations taking place at the end of the year, on the net
replacement value method.
• All other property, plant and equipment is accounted for on the cost model in accordance with IAS
16.
• Investment properties are accounted for on the fair value model in terms of IAS 40 Investment
Properties.
• Assume an appropriate before-tax discount rate of 10% per annum (compounded annually).
• Depreciation is accounted for on the straight-line method by CO.

REQUIRED:

MARKS
Subtotal Total

(a) Prepare the property, plant and equipment note of CO as at 31
December 2020. Additional qualitative and quantitative information
as well as the total column is not required.

Communication skills – presentation and layout
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(b) Discuss (1) the impact of the sentence ‘it was unclear if the fair value
of the building would be reliably measurable on a continuing basis’ on
the subsequent measurement and discuss (2) the calculation of the
subsequent measurement of the building in Vanderbijlpark in terms
of IAS 40 Investment Properties for the year ended 31 December
2020.

Communication skills – clarity of expression
8
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