Question Five Part A You are the financial accountant of Zambezi Ltd, a firm that manufactures and installs kitchen fittings. During the financial year ended 31 December, 2013 Zambezi Ltd refurbished its showroom in a large shopping complex in order to display the latest range of kitchen fittings. The cost of this refurbishment amounted to K450,000. Zambezi Ltd has been expanding and the current order book indicates an increase of 15% compared to the same period during the last financial year. The gross margin has always remained constant and the company generated a net income before tax for the current year of approximately 5 million, The managing director wishes to write off the cost of the refurbishment as a selling expense in the income statement for the current period. Required Write a memorandum to the managing director in details the appropriate accounting treatment of the above expenditure in the financial statement of Zambezi Lid for the financial year ended 31 December, 2013. Your answer should refer to the relevant definitions and the necessary legal and accounting requirements. 10 Marks Part B Thaba Limited was formed on 30th November 2013. On 1st January 2014 it acquired its first item of plant for K.400,000. The plant will be used in the manufacture of a soft drink called *Nicee'. Being a new company, it has not yet decided on the policy to adopt regarding subsequent measurement of property, plant and equipment. The director of Thaba Limited has read that there are two methods that are provided for in IAS 16 "Property, plant and equipment' as regards to subsequent measurement of property, plant and 6 Page equipment. However, he does not know the difference between the two methods with respect to how and when they are applied, and how they affect the financial statements. Required Describe cost model and revaluation model as subsequent measurement methods of valuing property, plant and equipment, in accordance with IAS 16. 10 Marks Question Five Part A You are the financial accountant of Zambezi Ltd, a firm that manufactures and installs kitchen fittings. During the financial year ended 31 December, 2013 Zambezi Ltd refurbished its showroom in a large shopping complex in order to display the latest range of kitchen fittings. The cost of this refurbishment amounted to K450,000. Zambezi Ltd has been expanding and the current order book indicates an increase of 15% compared to the same period during the last financial year. The gross margin has always remained constant and the company generated a net income before tax for the current year of approximately 5 million, The managing director wishes to write off the cost of the refurbishment as a selling expense in the income statement for the current period. Required Write a memorandum to the managing director in details the appropriate accounting treatment of the above expenditure in the financial statement of Zambezi Lid for the financial year ended 31 December, 2013. Your answer should refer to the relevant definitions and the necessary legal and accounting requirements. 10 Marks Part B Thaba Limited was formed on 30th November 2013. On 1st January 2014 it acquired its first item of plant for K.400,000. The plant will be used in the manufacture of a soft drink called *Nicee'. Being a new company, it has not yet decided on the policy to adopt regarding subsequent measurement of property, plant and equipment. The director of Thaba Limited has read that there are two methods that are provided for in IAS 16 "Property, plant and equipment' as regards to subsequent measurement of property, plant and 6 Page equipment. However, he does not know the difference between the two methods with respect to how and when they are applied, and how they affect the financial statements. Required Describe cost model and revaluation model as subsequent measurement methods of valuing property, plant and equipment, in accordance with IAS 16. 10 Marks
