QUESTION 3 [January 2019, Question 4]

Voodoo Limited is a manufacturing company that prepares its financial statements to 31 December each year. Before the financial statements for the year ended 31 December 2018 can be finalised, a number of outstanding issues need to be resolved.

Issue 1:

In January 2018, Voodoo Limited commenced a programme to extend and modernise the companys manufacturing facilities. The programme cost 2,500,000 and Voodoo Limited financed the work through a mixture of general and specific debt. The directors estimate that 60% of the programme was financed by general debt and 40% by specific debt. Voodoo Limiteds current general borrowing rate is 10% per annum while the specific debt carries an interest rate of 15% per annum. The programme was completed in December 2018.

3 Marks

Issue 2:

During 2018, Voodoo Limited decided to update and network the companys computer equipment. The details are as follows:

List price of computer hardware

Additional costs:

Shipping and handling

Cabling and wiring

One month testing prior to going live

Four-year on-site maintenance contract

Own staff costs related to preparation of offices prior to installation 1,000,000

40,000

60,000

20,000

160,000

32,000

With respect to computer hardware, Voodoo Limited negotiated a 10% trade discount on the list price and took advantage of a 5% early settlement discount for payment within 30 days.

Q1

Issue 1:

What is the interest cost to be capitalised in accordance with IAS 23 Borrowing Costs in the financial statements of Vodoo Limited for the year ended 31 December 2018 in respect of the modernisation programme?

Group of answer choices

500,000

400,000

300,000

200,000

Q2

Issue 2:

What is the amount to be capitalised in accordance with IAS 16 Property, Plant and Equipment in the financial statements of Vodoo Limited for the year ended 31 December 2018 in respect of the company's new computer equipment?

Group of answer choices

1,212,000

1,052,000

1,000,000

1,152,000