Question
Part A: i) How does IAS16 define Property, Plant and Equipment? ii)Banana Ltd (Banana ) has entered into a contract with Pluck plc (Pluck) for
Part A:
i) How does IAS16 define Property, Plant and Equipment?
ii)Banana Ltd ("Banana ") has entered into a contract with Pluck plc ("Pluck") for the purchase of high-specification manufacturing plant. The list price for the plant was 6 million, but Banana has negotiated a 6% discount. The plant requires very careful delivery and installation for which Pluck charges separate amounts. These are 27,000 and 72,000 respectively. The plant has to be tested after installation by Pluck's engineers to ensure it is operating correctly. There is a separate charge for this of 45,000. The plant is subject to an annual maintenance contract which Pluck provides at an annual cost of 72,000.
Banana has incurred legal fees of 15,000 relating to its contract with Pluck . It has also been required to clear an area of its manufacturing facility to house the new manufacturing plant, and to prepare the area so that the new plant can easily be installed. Banana incurred costs of 36,000 in undertaking this. Banana has assigned a member of its staff as the project manager responsible for liaising with Pluck and ensuring a successful installation and testing of the plant. His salary-related costs over this period were 63,000.
The new manufacturing plant was delivered by Pluck on 1 April 2021.
Required:
Applying the provisions of IAS 16 Property, Plant and Equipment, calculate the costs that Banana should initially report to mease the manufacturing plant in its financial statements for the year ended 30 June 2021.
Part B:
i)
On 1 July 2017 Mango plc ("Mango") acquired a property to use as its new Head Office. The property cost 3.6 million comprising land of 1,200,000 and buildings of 2,400,000. The land was not subject to depreciation, but the buildings were expected to have a useful life of 50 years at the date of purchase.
On 1 July 2020 Mango commissioned an independent valuation of the property, which showed that its market value had increased to 4.2 million, of which 1,380,000 was attributable to the value of land. Mango decided to incorporate this valuation into its financial statements. The expected useful life of the buildings remained unchanged.
Required:
Evaluate how the above valuation would be reflected in the financial statements of Mango and set out what the carrying value of the property would be in Peach's financial statements for the year ended 30 June 2021.
ii)
IAS 40 Investment Property allows the fair value model to be adopted in respect of Investment properties after initial recognition at cost.
Required:
Appraise how the fair value model is applied to Investment properties including how any valuation gains or losses arising are recorded in financial statements. Explain the rationale for the accounting treatment.
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