Question 1 (Part a and b are independent scenarios) Parta ABC Ltd has a technological asset, AXS which it uses to manufacture computer processing unit (CPU). The carrying amount of AXS after four years usage is $5 million (cost $9 million, accumulated depreciation of S4 million on a straight line basis). There is no expected scrap value. Due to a breakthrough in technology in the manufacture of CPU, ABC Ltd now expects the machine to produce 40% less in revenue terms than expected over the rest of its estimated useful life of 6 years. Net future cash flows for the next six years, based on management's best estimate after taking the 40% reduction into account, are as follows. (All in S000) Year ended Expected growth rate Future cash flow 660 700 730 750 +4% -5% (Hint: use future cash flow of year 4 and expected growth rate of year 5, to calculate the future cash flow of year 5) If the technological asset was disposed now, it would realize $3.2 million at net realizable value. The discount rate to be applied to the future cash flows is 8% Required Calculate any impairment loss and state the new carrying amount of the AXS. (Detailed calculation steps should be shown, for present value factor, please adopt after 3 decimal places) (12 marks) Part 1 DEF Property Ltd possessed the following three properties in Hong Kong Property D It was acquired on January 2012 with cost of $40 million which was used for warehouse purpose; the fair value on 31 December 2019 was $56 million. Property E It was bought on 1 January 2017 with cost of $36 million which was used for carning the rental income, the fair value on 31 December 2019 was $46 million. Question 1 (continued) Property F The company was to promote a residential development during 2019, the construction activities had significantly finished and the balance of costs carried in books is 5380 million In the board meeting held on 31 January 2020, DEF moved the storage of its inventories in Property D to a new production plant in Foshan. At 31 December 2019, all D, E properties were vacant. In view of economic downturn due to the outbreak of corona-virus disease, and slump in property market, it is forecasted that the whole project on properties F will realize a loss of $80 million. DEF Ltd has adopted following accounting policies on properties it possess: 1. the building under property, plant and equipment at cost model under HKAS 16 and depreciated with the estimated useful life of 30 years, ii. the investment property at fair value model under HKAS 40, and ill. properties for sale as inventories under HKAS 2. Required: Determine the classification of these three properties and briefly explain the reason of classification, address the accounting treatment and state whether depreciation is required, then, calculate the respective amounts to be recognized on the statement of Financial Position as at 31 December 2019. (Extracts of Financial Statement are not required) (13 marks) Parte In accordance with HKAS 36 Impairment of Assets, briefly comment which accounting concept is referred to in the case of reversal of impairment losses (2 marks). On the other hand, explain the drawback of using revaluation model in assessing the value of Property, Plant and equipment (3 marks). (Total: 30 marks) Question 1 (Part a and b are independent scenarios) Parta ABC Ltd has a technological asset, AXS which it uses to manufacture computer processing unit (CPU). The carrying amount of AXS after four years usage is $5 million (cost $9 million, accumulated depreciation of S4 million on a straight line basis). There is no expected scrap value. Due to a breakthrough in technology in the manufacture of CPU, ABC Ltd now expects the machine to produce 40% less in revenue terms than expected over the rest of its estimated useful life of 6 years. Net future cash flows for the next six years, based on management's best estimate after taking the 40% reduction into account, are as follows. (All in S000) Year ended Expected growth rate Future cash flow 660 700 730 750 +4% -5% (Hint: use future cash flow of year 4 and expected growth rate of year 5, to calculate the future cash flow of year 5) If the technological asset was disposed now, it would realize $3.2 million at net realizable value. The discount rate to be applied to the future cash flows is 8% Required Calculate any impairment loss and state the new carrying amount of the AXS. (Detailed calculation steps should be shown, for present value factor, please adopt after 3 decimal places) (12 marks) Part 1 DEF Property Ltd possessed the following three properties in Hong Kong Property D It was acquired on January 2012 with cost of $40 million which was used for warehouse purpose; the fair value on 31 December 2019 was $56 million. Property E It was bought on 1 January 2017 with cost of $36 million which was used for carning the rental income, the fair value on 31 December 2019 was $46 million. Question 1 (continued) Property F The company was to promote a residential development during 2019, the construction activities had significantly finished and the balance of costs carried in books is 5380 million In the board meeting held on 31 January 2020, DEF moved the storage of its inventories in Property D to a new production plant in Foshan. At 31 December 2019, all D, E properties were vacant. In view of economic downturn due to the outbreak of corona-virus disease, and slump in property market, it is forecasted that the whole project on properties F will realize a loss of $80 million. DEF Ltd has adopted following accounting policies on properties it possess: 1. the building under property, plant and equipment at cost model under HKAS 16 and depreciated with the estimated useful life of 30 years, ii. the investment property at fair value model under HKAS 40, and ill. properties for sale as inventories under HKAS 2. Required: Determine the classification of these three properties and briefly explain the reason of classification, address the accounting treatment and state whether depreciation is required, then, calculate the respective amounts to be recognized on the statement of Financial Position as at 31 December 2019. (Extracts of Financial Statement are not required) (13 marks) Parte In accordance with HKAS 36 Impairment of Assets, briefly comment which accounting concept is referred to in the case of reversal of impairment losses (2 marks). On the other hand, explain the drawback of using revaluation model in assessing the value of Property, Plant and equipment (3 marks). (Total: 30 marks)