Omega prepares financial statements under International Financial Reporting Standards. On 1 April 20X6, Omega began the construction of a new production line. Costs relating to the line are as follows

Amount

Costs of the basic materials 10,000

(list price $12.5 million less a 20% trade discount)

Recoverable sales taxes incurred not included in the purchase cost 1,000

Employment costs of the construction staff for the three months to 30 June 20X6 (Note 1) 1,200

Other overheads directly related to the construction (Note 2) 900

Payments to external advisers relating to the construction 500

Expected dismantling and restoration costs (Note 3) 2,000

Show the impact of the transaction on the statement of profit or loss and other comprehensive income of Omega for the year ended 31 March 20X7, and on its statement of financial position as at 31 March 20X7. You should state where in the statement of profit or loss and other comprehensive income and the statement of financial position relevant balances will be shown.

Note 1 The production line took two months to complete and was brought into useon 31 May 20X6.

Note 2 The other overheads were incurred in the two months ended 31 May 20X6.They included an abnormal cost of $300,000 caused by a major electrical fault.

Note 3 The production line is expected to have a useful economic life of eight years.At the end of that time, Omega is legally required to dismantle the plant in a specified manner and restore its location to an acceptable standard. The figure of $2 million included in the cost estimates is the amount that is expected to be incurred at the end of the useful life of the production plant. The appropriate rate to use in any discounting calculations is 5 per cent. The present value of $1 payable in eight years at a discount rate of 5 per cent is approximately $0.68.

Note 4 Four years after being brought into use, the production line will require amajor overhaul to ensure that it generates economic benefits for the second half of its useful life. The estimated cost of the overhaul, at current prices, is $3 million.

Note 5 Omega computes its depreciation charge on a monthly basis.

Note 6 No impairment of the plant had occurred by 31 March 20X7.

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