Introduction

Future Toys International plc (FTI) manufactures childrens toys. The company began

operations on 1 January 2015 and has a 31 December year-end. FTI is compiling data

about fixed assets for its financial statements prepared under International Financial

Reporting Standards (IFRS). You are a junior accountant working for FTI, specialising in

the area of asset recognition. You have been asked by your manager, Ms. Lee to

prepare a report addressing issues relating to accounting for FTIs assets.

Part 1 considers initial measurement of asset costs and depreciation for the companys

first year of operations. Part 2 analyses events in a subsequent year of operations. Part

3 explores the related area of intangible assets. You must research and reference

relevant sources throughout your report, as appropriate, to support your conclusions

and recommendations. Relevant sources include IFRS, IASB Conceptual Framework,

and other wider reading.

Part 1: initial year of operations

(max 800 words)

In 2015, FTI purchased land on 1 January for 100,000. When the company

purchased the land, there was an existing building on the property. On 3 February, FTI

paid 20,000 in demolition costs to remove this old building. On 3 March, FTI paid a

5,000 fee to the local authority for pavements on the land. The company also paid 6,500 on 3 March to install fencing around the propertys perimeter with is expected

to last 15 years.

FTI constructed a new building on the property to house its operations. Construction

began 3 March and ended 30 June. FTI moved into the new building and began using it

for operations on 1 July. The company incurred the following expenditures for

construction of the new building: 125,000 (3 March); 100,000 (1 April); 75,000 (1

May); 100,000 (2 June); and 50,000 (1 July). FTI also purchased the following in 2015:

production machinery on 1 January for 80,000; office equipment on 1 May for 7,500;

and office furniture on 1 July for 7,000. Both the machinery and the office furniture is

expected to be replaced after 7 years and the office equipment has a life of 5 years.

The new building has an expected life of 39 years.

Annual 2015 pre-tax income before accounting for any of the above items is

50,000. FTIs effective tax rate is 40 percent. Events and circumstances do not suggest

impairment of any fixed assets as of 31 December, 2015 but FTI does estimate the new

buildings salvage value is 20,000. FTI expects zero resale value for all other fixed

assets. Based on manufacturers specifications and industry reviews for the production

machinery, FTI anticipates the machinery will be most productive earlier in its life and

that maintenance costs directly correlate with the age of the machinery. However, FTI

intends to retain the machinery and use it for as long as possible.

In your report, address the following:

a) Identify which international accounting standard prescribes how to deal with

the type of assets mentioned in the case. Outline the recognition criteria and

explain the prescribed valuation model to be used for initial recognition.

b) Identify FTIs depreciable fixed assets as of 31 December, 2015. For each

depreciable asset, present a listing of the following data: asset item, date

placed in service, cost, salvage value, and useful life.

c) Compute and present annual depreciation expense for the years 31 December,

2015 to 31 December, 2019 (i.e. for five years) for each depreciable fixed asset

using each of the following methods: straight line, 150 percent diminishing

balance, and sum-of-the-years digits. Discuss the implications of each method

of computing depreciation for FTIs results in 2015, citing relevant sources to

support as appropriate.

d) Recommend a depreciation method for financial reporting of each of FTIs

depreciable fixed assets, with logical reasoning and justification for your 3

recommendations. (Note: Methods do not have to be the same for all assets.)

What is FTIs 2015 net income based on your recommendations?

e) Independent of your recommendations, discuss which method you would

choose if you are part of FTIs upper management. Assume you have a cash

bonus based on reported net income and intend to stay with the company for

three years. Why would you choose this method? Would your choice change

if the bonus had an equity component (shares in FTI) and you intend to stay

with the company for twenty years versus three years? Why?

Part 2: subsequent events in 2019

(max 500 words)

FTI implements your recommendations from part 1 (initial year of operations) in

2015 and subsequent years. In 2019, there are two events (detailed below) relating to

FTIs fixed assets. Determine how FTI should account for each event. Note that not all

of the required situational information may be explicitly present in the given details,

requiring your professional judgment and application of critical thinking skills. In your

report, provide detailed explanations of your analysis and your judgments at each

necessary step to account for the events, with logical reasoning and justification to

support your conclusions, citing relevant sources as necessary. Include any required

journal entries to illustrate the proper accounting for each event and any assumptions

made.

a) Event 1: On 2 September, FTI install a replacement roof on the building. The

old roof (that originally cost 60,000 as part of the building construction in

2015) was in need of significant repairs estimated to cost 40,000. FTI chose

to instead replace the entire roof at a cost of 50,000 cash. (Note: Also

discuss if and how this affects accounting for the building in future years.)

b) Event 2: On 30 December, FTI evaluates its production machinery. Due to

changes in product specifications, one machine (originally purchased for

45,000 on 1 January, 2015) is not going to be used in production after 31

December 2019. The machines market value was 25,000 on 31 December,

2018. FTI could sell the machine for 10,000 on 30 December, 2019.

However, FTI does not plan to sell or otherwise dispose of the machine.

Rather, the company intends to retain the machine in case it has a purpose

in the future, even though FTI anticipates the machine will be indefinitely idle. (Note: Also discuss how FTI should account for this machine in future

years.)

Part 3: Accounting for Intangible Assets

(max 700 words)

During a meeting with Ms. Lee, she also wants you to briefly explain whether the

accounting standards permit the recognition of the companys brand in the financial

statements. Please explain your answer.

This is your chance to shine and perhaps even get a permanent job offer: you must

do this well!