Q8.

(a) Statement of profit or loss and other comprehensive income for the year ended

30 June 2013;

(b) Statement of financial position as at 30 June 2013;

(c) Statement of movement of property, plant and equipment for the year ended

30 June 2013;

(d) Statement of changes in equity for the year ended 30 June 2013.

AF3110 Intermediate Accounting 1 Week 5 - Questions Question 1 (Basic) An entity owns a building which originally cost $200,000. The building is depreciated over 50 years on a straight-line basis with no residual value. The entity adopts a policy of revaluation for building. The building has so far had three valuations as follows. At start of Year 2 - valuation $230,000 At start of Year 4 - valuation $260,000 At start of Year 6 - valuation $300,000 At start of Year 8 - valuation $220,000 Required: Calculate the annual depreciation charge for years one to six, the transfers to revaluation surplus through other comprehensive income in years 2, 4, 6 and 8 and the transfers from revaluation reserves to retained earnings in the statement of changes in equity in years 1 to 8. 1 AF3110 Intermediate Accounting 1 Week 5 - Questions Question 2 (Basic) Turbo Ltd had the following non-current assets at 31 December 2011: Land Buildings Plant and machinery Fixtures and fittings Cost $'000 500 400 1,613 390 2,903 Depreciation $'000 80 458 140 678 NBV $'000 500 320 1,155 250 2,225 In the year ended 31 December 2012 the following transactions occur: (1) Additions to plant and fixtures are $154,000 and $40,000 respectively. (2) The following non-current assets are sold. Plant Fixtures Depreciation brought forward $'000 195 31 Cost $'000 277 41 Proceeds $'000 86 2 (3) Turbo adopts the revaluation model for the land and building. The remaining non-current assets are using the cost model. (4) Land and building were revalued at 1 January 2012 to $1,500,000, of which land is worth $900,000. (5) The useful life of the buildings is unchanged. The buildings were purchased ten years before the revaluation. (6) Depreciation is provided at the year end at the following rates. Buildings - 2% per annum straight line Plant - 20% per annum straight line Fixtures - 25% per annum reducing balance (7) It is the company's policy to charge a full year's depreciation in the year of purchase and no depreciation in the year of disposal. Required: Show the reconciliation of the carrying amount at the beginning and end of the period showing: addition, disposals, increases/decreases during the period from revaluation and from impairment losses, impairment losses recognized in profit and loss, depreciation and any other movement, under HKAS 16 \"Property, Plant and Equipment\" that is required in the notes to the financial statements for the year ended 31 December 2012. 2 AF3110 Intermediate Accounting 1 Week 5 - Questions Question 3 (Difficult) The following transactions and events are related to a freehold property of Millen Ltd (Millen) from 2010 to 2013. 30 June 2010 The freehold property was purchased for $300,000 on 30 June 2010. The building element in the cost was estimated at $120,000 with an estimated useful life of 40 years. 30 June 2011 The open market value of the property was estimated to be $380,000 (including building element of $160,000). 1 July 2011 The estimated useful life of the property at this date was revised to 50 years. 30 June 2012 The open market value of the property was estimated to be $290,000 (including building element of $100,000). 30 June 2013 The property was sold for $320,000. Millen has accounting periods ending on 30 June and uses the straight-line method to depreciate properties. Millen opts for a transfer between the revaluation surplus and retained earnings on an annual basis. Required: Show how the freehold property would be accounted for in the statements of financial position and statements of comprehensive income of Millen for the years ending 30 June 2010 to 30 June 2013 under the following independent scenarios: (a) Millen classifies the freehold property (with land and buildings as two separate classes) as a property, plant equipment and does not revalue its properties; (b) Millen classifies the freehold property (with land and buildings as two separate classes) as a property, plant equipment and revalues its properties; and (c) Millen classifies the freehold property (with land and buildings as two separate classes) as an investment property and measures it at fair value. 3 AF3110 Intermediate Accounting 1 Week 5 - Questions Question 4 (Moderate) Bilmont Properties Ltd has a number of investment properties at 31 January 2013. Details of certain properties are as follows: Property A Acquired for $4.5m in December 2012. Stamp duty and legal fees on acquisition totalled $250,000. The fair value of the property at 31 January 2013 was $4.9m. The estimated useful life is 25 years. Property B Acquired in 2005 for $2.6m (with an estimated useful life of 40 years) and included at fair value of $6.3m as at 31 January 2012. The fair value at 31 January 2013 is estimated to be $6.1m. Property C Acquired in 2007 for $3.4m and included at fair value of $5.1m as at 31 January 2012. During the year to 31 January 2013, $3.1m was spent upgrading and refurbishing the property. This has led to increase in the rent for the property and, as a result, its estimated fair value at 31 January 2013 is $9.4m. Had the additional expenditure not been incurred it is estimated that the value of the property would have been $5.2m. The property has an estimated useful life of 35 years. Property D Purchased on 1 June 2012 for $4.2m with an estimated useful life of 40 years. The property is specialized and the directors are of the opinion that it will not be possible to obtain reliable fair values on a continuing basis. Accounting policy (i) Investment properties are measured at fair value. (ii) Where no reliable fair values can be obtained on a continuing basis, properties are carried at cost and amortised over their estimated useful life on a monthly basis. Required: Explain how the properties should be dealt with in the accounts of Bilmont Properties Ltd for the year to 31 January 2013. 4 AF3110 Intermediate Accounting 1 Week 5 - Questions Question 5 (Moderate) Should accounting for revaluation increases and decreases be done on an asset-byasset basis or on class-of-assets basis? Question 6 (Moderate) On August 1, Alpha Ltd exchanged productive assets with Beta Ltd. Alpha's asset is referred to below as \"Asset A,\" and Beta's is referred to as \"Asset B\". The following facts pertain to these assets. Original cost Accumulated depreciation (to date of exchange) Fair market value at date of exchange Cash paid by Alpha Ltd Cash received by Beta Ltd Asset A $96,000 45,000 60,000 15,000 Asset B $110,000 52,000 75,000 15,000 Required: (a) Assuming that the exchange of Assets A and B has commercial substance, record the exchange for both Alpha Ltd and Beta Ltd in accordance with HKAS 16 \"Property, Plant and Equipment\". (b) Assuming that the exchange of Assets A and B lacks commercial substance, record the exchange for both Alpha Ltd and Beta Ltd in accordance with HKAS 16 \"Property, Plant and Equipment\". 5 AF3110 Intermediate Accounting 1 Week 5 - Questions Question 7 (Moderate) In 2000, the board of directors of Abba Ltd agreed to construct their own building. Construction was completed in January 2001 at a cost of $4,000,000 and the company immediately moved into the new building. At that time, it was estimated that the building would have a useful life of 40 years and a residual value of $120,000. In January 2011, an additional wing to the building was constructed at a cost of $1,000,000. At that time, it was estimated that the useful life of the old building remained unchanged and that the additional wing would have a life of 30 years with a residual value of $40,000. In January 2029, a surveyor informed the board of directors that the useful life of the whole building could be extended to the end of 2060, i.e., with 20 years more than the original estimate. The board of directors accepted the recommendation. It is the company's policy that straight-line method is adopted for depreciation of buildings. Required: (a) Compute the annual depreciation charged during the period from 2001 to 2010. (b) Compute the annual depreciation charged during the period from 2011 to 2028. (c) Compute the annual depreciation to be charged starting 2029 onwards. 6 AF3110 Intermediate Accounting 1 Week 5 - Questions Question 8 (Moderate) CyberMax Ltd's trial balance at 30 June 2013 was as follows: Freehold premises Plant and machinery, cost & accumulated depreciation Furniture and fittings, cost & accumulated depreciation Inventory at 30 June 2013 Sales Administrative expenses Ordinary shares, 4,500,000 shares Trade investments Revaluation reserve Accounts receivable and payable Cost of goods sold Distribution costs Dividend received Interim dividend paid Retained earnings Disposal of warehouse Cash and bank balances $000 2,400 1,800 620 1,468 $000 540 360 6,465 1,126 365 947 4,165 669 5,000 600 566 80 200 488 225 564 The following information is available: 1. 2. 3. 4. 5. 6. Freehold premises acquired for $1.8 million were revalued at 30 June 2012, recognizing a gain of $600,000. These include a warehouse, which cost $120,000 was revalued at $150,000 and was sold in June 2013 for $225,000. CyberMax does not depreciate freehold premises. CyberMax wishes to report Plant and Machinery at open market value which is estimated to be $1,960,000 on 1 July 2012 but not yet reflected. Its accounting policy is to depreciate its assets on the straight-line method at annual rates as follows: Plant and machinery 10% Furniture and fittings 5% CyberMax opts for a transfer between the revaluation surplus and retained earnings on an annual basis. During the year the company has issued one million shares at $1.2 each. Included within the administrative expenses are the following: Staff salary (including $125,000 to directors) $468,000 Directors fees 96,000 Audit fees and expenses 86,000 Profits tax for the year is estimated at $122,000. Required: (a) (b) (c) (d) Statement of profit or loss and other comprehensive income for the year ended 30 June 2013; Statement of financial position as at 30 June 2013; Statement of movement of property, plant and equipment for the year ended 30 June 2013; Statement of changes in equity for the year ended 30 June 2013. 7 AF3110 Intermediate Accounting 1 Week 5 - Questions Question 9 (Basic) The following costs were incurred in 2014 in the design and construction of a new office building over a nine-month period during 2014: $'000 Feasibility study 8 Architects' fees 100 Site clearance (by external demolition professionals) 80 Construction materials 600 Cost of own inventories used in the construction (net realisable value if sold outside the company $24,000) 30 Internal construction staff salaries during period of construction 360 External contractor costs 2,400 Income from renting out part of site as storage depot during early phase of construction (12) 3,566 Required Calculate the amount that should be capitalised as property in the financial statements for the year ending 31 December 2014. 8 AF3110 Intermediate Accounting 1 Week 5 - Questions Question 10 (Moderate) Superb Wealth Ltd (SWL) has a year-end of 31 December and the following accounting policies for property, plant and equipment are adopted. SWL adjusts and closes its accounts annually at 31 December for the preparation of financial statements. \"The policies of owner occupied property, investment property and all other assets are revaluation model, fair value model and cost model respectively. Depreciation is calculated on an annual basis. SWL uses straight-line depreciation. No residual value for all property, plant and equipment.\" SWL purchased a property in Quarry Bay (known as property QB) which is a commercial property on 1 March 2010 at a cost of $10,080,000. The estimated useful life of the property QB is 40 years from the date of purchase. SWL used the property as its own office. 0n 31 December 2010, property QB was valued at $10,810,000. The estimated useful life remains unchanged. On 31 December 2013, property QB was valued at $13,002,000. The property was estimated to have a remaining useful life of 48 years as of that date. On 1 January 2014, SWL purchased a property in Mong Kok (known as property MK) at a cost of $13,000,000 for capital appreciation. The estimated useful life of the property MK is 40 years from the date of purchase. The fair value of property MK at 31 December 2014 was $14,000,000. Property QB was sold for $14,000,000 on 31 December 2014. Required: In accordance with HKAS 16 \"Property, plant and equipment\" and HKAS 40 \"Investment Property\" and ignore separation of land and building components for the property QB and property MK, a) Show the journal entries of SWL's property for the year to 31 December 2010; b) Show the journal entries of SWL's property for the year to 31 December 2013; and c) Show the journal entries of SWL's properties for the year to 31 December 2014 9