Question 2) (5 marks)

Large Mart has recently finished building a new factory for computers in Armidale. Large Mart was using its own staff and several items of its own machinery/equipment that were specifically acquired to undertake parts of the building works. The overall construction work took a total of 15 month, with Large Mart staff working on the project throughout this time.

The Large Mart Finance Department has calculated that during the 15 month construction time, the following expenditures occurred (please note that not all expenditures of the construction project are listed).

Total depreciation of the Machinery/Equipment account of $30,000. With $20,000 of this amount being for the depreciation of machinery/equipment that was specifically acquired for the project and that was not used in any other Large Mart activities;

Total interest payments made by Large Mart during the construction of the factory of $100,000. Of this amount $16,000 relate to a loan (with an overall loan value of $300,000 and a repayment duration of 5 years) that Large Mart took out to finance components used in the factorys production line. The remaining interest payments during this time related to a different loan that was used to purchase an office building in a previous year.

The CFO is not sure how to treat these expenditures in the books of Large Mart, and has asked you to investigate, and write a report about, the following questions:

a) What are the accounting requirements for reporting entities in Australia regarding the accounting treatment(s) of the depreciation that was calculated by the Finance Department (your report should NOT discuss different methods to calculate depreciation!!!)? In your answer you should discuss (1) what relevant requirements exist in relation to the accounting treatment(s) of all components of the depreciation calculated by the Finance Department, and (2) how Large Mart should apply these requirements in the given situation.

b) What are the accounting requirements for reporting entities in Australia regarding the accounting treatment(s) of all components of the interest expenditures calculated by the finance department? In your answer, you should discuss (1) what relevant requirements exist in relation to the accounting treatment(s) of all components of the interest calculated by the Finance Department, and (2) why the accounting treatment(s) you have identified are required in the given situation.