Question :

1. Please calculate work in process inventory balance at the end of 31 December 20x7?

2. Describe accounting valuation for the 1 WIP carpet that will be sold for 3.000 with cost 800 to other hotel group?

3. Compute the value of the wool raw material inventory reported in the Launch Statement of Financial Position as of December 31, 19X7.

4. Describe accounting treatment for surplus carpet material which a byproduct from specialized carpet?

Introduction

Rocket plc (Rocket) is the holding company of a group of companies which prepares their financial statements in accordance with international accounting standards. The principal activity of Rocket is to act as a holding company. Throughout the year ended 31 December 2x07 the holding company owned 100% of two subsidiaries which are listed below:

Launch plc (Launch) : A company whose principal activity is the manufacture and sale of carpets to retail outlets.

Space plc (Space) : A company specialising in developing and promoting a range of bathroom accessories.

(i) Work in progress inventory

Launch (plc) manufactures a range of specially designed carpets for the hotel and leisure industry, and a custom built factory was constructed for this purpose. Launch has achieved its target output of 10000 customised carpets in each of the years 2x03-2x06. During 2x07 this production level was exceeded due to staff agreeing to work double shifts in order to meet an unexpected increase in demand during the summer season. Consequently, 12000 finished carpets were produced in the year ended 31 December 2007.

At 31 December 2007, Launch had 200 carpets in inventory, which on average were 75% complete. Each completed carpet incurs the following costs:

Material $1.500

Labour $600

Distribution Costs $100

Sales Commissions $150

Total 2.350

The followong additional costs were incurred in the year ended 31 December 2x07, in respect of the overall operation of the factory:

Production supervisors' salaries $2.550.000

Depreciation of Equipment $ 1.250.000

Administration Costs $ 400.000

Interest relating to financing of inventory $ 90.000

One of the 75%-completed carpets was manufactured for the Regency, a family-run hotel, which, after a poor winter season, decided to close with immediate effect in early January 2x08. The general manager of the factory is confident that if Launch were to spend a total of $800 on promotion and distribution costs, that the carpet could be offloaded to another hotel group for $3.000.

(ii) Carpet ends and floor mats

During 2x07, Launch decided to market surplus carpet materials as carpet ends and floor mats. Previously, these materials had been dumped, buth with spriralling waste disposal costs, it was decided to opt for an alternative use approach.

During 2x07, a cash surplus of $130.000 was generated from the sale of these products; it was estimated that inventories of surplus carpet materials at 31 December 2x07 could be sold in January for further net proceeds of $25.000.

(iii) inventory of wool

Wool is the primary material used by Launch for the manufacture of specialised carpets. Wool inventory at 31 December 2x07 had cost $600.000 to purchase, but only had a net realisabe value of $200.000. On the basis that Launch does not intend to dispose of the wool, the inventory has been included in the financial statements at a value $450.000. It is believed that tis partially reflects the fall in value of the wool, but also takes account of the intention to retain the inventory for use in the production process. It is expected that the finished carpets, into which the wool will be incorporated, can be sold at a reasonable profit margin.

(iv) Sale and Lease Back

On 1 January 2x07, the factory used for the manufacture of specialised carpets, along with its three-acree car park, was sold to an insurance company. Both assets were immediately leased back to Launch under a 50-year lease agreement.

The factory, which was completed in 2x02, had cost $6 million to construct. The car park had been purchased and developed alongside, at an additional cost of $4 million. Up to the time of their sale, both assets had beeb carried in the financial statements using the revaluation model of IAS 16 property, Plant and equpment. On the 31 December 2x06, the factory was included in the financial statements of Launch at its fair value $10 million. The parking lot was included in the statement of financial position at $7 million on the same date.

Under the terms of the sale and lease-back agreement of 1 January 2x07, the factory was sold to the insurance company for $12 million, and the consideration agreed for the car park was $9 million, which was its fair value at the time of sale.

Launch agreed to pay 50 annual instalments, in advance, of $500.000 in respect of the factory. Launch has an option to extend the lease of the factory for a secondary period of 30 years by making further annual payments of $10.000.

Launch agreed to pay 50 annua instalments, in advance, of $400.000 in respect of the lease of the car park.

Launch charges depreciation of 2% per annum straight-line on the factory;no depreciation is charged in respect of the car park. It should be assumed that the interest rate implicit in the lease is 10%.

Space plc

Building

On 1 January 2x03, Space purchased a building for $6 million. The building was depreciated over 50 years on a straight-line basis. A full year's depreciation is charged in the year of purchase and no depreciation is charged in the year of sale.

On 1 January 2x05, the building was deemed to have suffered an impairment, and it was written down to $4 million. On 1 January 2x07, the building was revalued to $7 million. It was sold to Launch on 31 December 2x07 for $8 million, which was certified as its fair value by an independent auctioneer.