Question 5 Armitage Ltd are an oil drilling company. During the year ended 31 December 2020 they completed the construction of two new assets and require your help with the accounting treatment for these in their financial statements. a) Housing development On 1 January 2020, Armitage Ltd commenced the construction of a residential property with the intention of renting it out to tenants once constructed. The property will be accounted for using IAS 40 Investment Properties using the fair value model. The construction was completed on 31 March 2020, and the following costs associate with the construction had been incurred:

*Interest costs relate to a loan taken out by Armitage Ltd on 1 January 2020 31 March 2020 specifically to finance the construction of the property. The cost of construction is considered a reasonable approximation to fair value on 31 March 2020.

On 1 April 2020, tenants moved into the property and began paying rent. The accountant has appropriately accounted for the receipt of rental income. On 31 December 2021, the property is valued at 185,000. Required: Explain, with journals, the accounting treatment of the property: i) On completion of the property on 31 March 2020 and ii) At the year-end 31 December 2020.

12 marks

b) New oil rig On 30 September 2020, Armitage Ltd completed the construction of a new oil rig in the North Sea and incurred directly attributable costs of 1,200,000. As part of the planning permission granted by the UK government, Armitage must pay restoration fees of 750,000 at the end of the rigs use in 20 years time. No accounting entries have been made in respect of the oil rig or restoration costs. Armitages cost of capital is 4%. Required: Explain, with journals, the treatment of the oil rig and restoration fees: i) At 30 September 2020; and ii) In Armitage Ltds financial statements for the year ended 31 December 2020.

(costs table is in the image I uploaded)

accounting treatment for these in their financial statements. a) Housing development On 1 January 2020, Armitage Ltd commenced the construction of a residential property with the intention of renting it out to tenants once constructed. The property will be accounted for using IAS 40 Investment Properties using the fair value model. The construction was completed on 31 March 2020, and the following costs associate with the construction had been incurred: Purchase of land 47.000 Allocated overheads 15,250 Building materials 24,500 Construction labour 33,500 Interest costs on a loan taken out to finance the construction* 2,000 122,250 *Interest costs relate to a loan taken out by Armitage Ltd on 1 January 2020 31 March 2020 specifically to finance the construction of the property. The cost of construction is considered a reasonable approximation to fair value on 31 March 2020. accounting treatment for these in their financial statements. a) Housing development On 1 January 2020, Armitage Ltd commenced the construction of a residential property with the intention of renting it out to tenants once constructed. The property will be accounted for using IAS 40 Investment Properties using the fair value model. The construction was completed on 31 March 2020, and the following costs associate with the construction had been incurred: Purchase of land 47.000 Allocated overheads 15,250 Building materials 24,500 Construction labour 33,500 Interest costs on a loan taken out to finance the construction* 2,000 122,250 *Interest costs relate to a loan taken out by Armitage Ltd on 1 January 2020 31 March 2020 specifically to finance the construction of the property. The cost of construction is considered a reasonable approximation to fair value on 31 March 2020