Question 3

Agri-Green Namibia Limited has been trying to develop a chemical that can be released into the atmosphere to break the greenhouse gases that are less damaging to the environment.

The accountant is aware that N$1 543 350 has been incurred, and paid for, between 2016 to 2019, but has been told by the auditors that the manner in which he has accounted for these costs is incorrect and, given the significant amounts involved they will have to qualify the auditors report if it is not corrected. The auditors had already told him to correct this a month ago, but he has not done so, since he has lost the original detail provided to him by the chief scientist.

The chief scientist has scribbled the following details down for you regarding the work done on this project by his department to date:

Memorandum

From: Chief Scientist

To: Financial Accountant

Below please find a summary of events that occurred between 2016 and 2019.

2016

• We spent N$175 800 (45% on research and 55% on chemists working on the development of the chemical). We were in the early stage of the project in 2016 and thus we were not yet sure if it was technically feasible.

2017

• We spent N$987 500, all of which was incurred in our laboratories. We had a meeting to explain that our project was definitely technically feasible. If you remember, you were in attendance and remarked that certain definitions and something you referred to as the recognition criteria, had all been met. (I am not sure what this means to you, if anything, but I have the minutes from the meeting scribbled in my diary).

• One of the bean counters from upstairs said something about a recoverable amount of N$775 000 at 31 December 2017. I am not sure what he meant, but it may be important to youit had to do with CleenSky Limited going into competition with us if I recall correctly.

2018

• This was a bad year to start with: our project was suspended in January due to the significant competition posed by CleenSky Limited. We were forced to draft budgets and perform cost projections and such to ensure that our project was financially viable. Obviously, the concerns were groundless, and we simply ended up wasting N$33 250 on this little exercise (which wasted the entire month).

• We were given the go-ahead in February to resume our work and spent N$346 800 over the rest of the year. My records reflect that your department decided that your definitions and recognition criteria for capitalization were met from February oh, and your recoverable amount on 31 December 2018 was calculated to be N$1 360 000. By the way, of the N$346 800, N$40 000 was spent on administrative tasks.

• We finished our project around Christmas time or maybe a day or so before New Year, I cant recall exactly. So, we were ready to go into production from January 2019, but for some reason production did not happen until 1 April 2019.

Hope this helps.

The accountant has shown you this memorandum and has asked that you show him how he should account for this project. He tells you that the project has a useful life of 5 years, a nil residual value and amortization is calculated on the straight-line basis.