Marley Limited prepares its financial statements to 31 December each year, and three issues need to be resolved before the financial statements for the year ended 31 December 2012 can be finalised.

Issue 1:

On 1 January 2012, Marley Limited entered into a contract with a building company to build new administrative offices for the company at a cost of 10,000,000. In order to finance the cost of the contract, Marley Limited 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 it would take to build the offices. The construction of the offices was completed on 31 December 2012 and the loan was repaid on the same date. As Marley Limiteds profits for the year ended 31 December 2012 are higher than expected, the directors of Marley Limited wish to expense the loan interest paid during 2012.

Requirement

Explain whether the policy put forward by the directors of Marley Limited is acceptable.

Issue 2:

In December 2012, Marley Limited announced publicly its intention to reduce the lead content of paint manufactured by the company. This will involve modifying the companys plant and equipment at an estimated cost of 12,000,000, payable in equal annual instalments over the next six years, commencing in December 2013. Plant and equipment at 31 December 2012 has a remaining useful economic life of six years. The changes were prompted by market pressures and evaluated using discounted cash flow techniques. The discount rate used was 10%.

Requirement

Show the amounts to be included in the financial statements of Marley Limited for the year ended 31 December 2012 in respect of this.

Can you also clearly show any accounting adjustments required?