Required: 1. Advise the correct accounting treatment of the issues relating to the companys inventories in the statement of the financial statement of the company for the year ended December 31, 20X6. Set any relevant journal entries. 2. Advise the correct accounting treatment of the head office property and the investment property. Set any relevant journal entries, ignoring any impact of the depreciation charge. 3. Advise the correct accounting treatment of research and development expenditures. Set any relevant adjusting journal entries. 4. Advise the correct accounting treatment of the printing equipment. Set any relevant journal entries.

Case 2 ABC Limited originally produce and sell a toy soldier. The toy soldier market had been on a declining trend for some time, and the company had diversified into the manufacture and distribution of giftware and classics miniatures. There have been two categories sales: - Kit sales, compromises the sale of miniature moulds, together with a solid block of the lead based compound. Costumers would use the kits, to make their own figures which they could paint if desired. - Item sales, involves inhouse manufacturer of completed products, encompassing the giftware and miniature range. Costumers would be presented with a finished product, which had been moulded and painted by the company's employees. As an audit manager of KAP XYZ you are auditing the draft of financial statement of ABC limited for the year ended 31 December 20X6. The following issues were identified during the audit process. Inventories ABC Limited inventories of raw material includes a great number of small product that cannot be specifically identified. Such items, referred to as "Category C " inventories has always been included in the financial statements of the company on a LIFO basis. The inventories are valued at US\$640,000 at 31 December 20x6. Mr. X, the financial director of ABC Ltd, had been content with this method of valuation of the inventories for a number of years, as the cost products did not tend to move significantly. However in the current year (year ended 20X6), he has noted that the cost of some products has decrease considerably, with the effect that the inventories would be valued at $530,000 if a FIFO basis of valuation used. Mr X has also noted that other inventories, included in the draft financial statements of ABC Limited for the year ended December 31,206 at a value of $130,000 could be currently be sold for $280,000 as the product has become very popular with the costumers. These inventories originally cost $190,000, but had been written down to $130,000 at Dec 31, 205. Investment Property ABC Limited owns two properties. One is used as the Company's head office and is included in the property plant and equipment an the other is an investment property that is leased to a third party under 10 years operating leased. In the Past ABC Limited has revalued the head office building each year and transferred any movement to the revaluation reserve. The investment property was purchased during the year ended 31 December 205. Relevant details of the costs and fair value of the properties are as follows: The valuation at 31 December 20X6 have not yet incorporated into the financial statements. The board would like to apply the fair value model to the investment property for the current reporting period. Ignore any depreciation impact. Intangible Assets The growth in kit sales has been restricted in recent years by health concerns related to their high lead content. For several years ABC has been researching the possibility of developing an alternative substance, which could continue to have the essential hardening characteristics. A major breakthrough was achieved early in 20X6, an it is now probable that the lead content can be reduced to insignificant levels. This is likely to materially increase the level of kit sales. The company has incurred the following expenditure in the last two years relating to the project: - US\$50,000 in 20X5-written of to the statement of the comprehensive income when incurred, but credited to the same statement in 206 and included under trade and othe receivables at 31 December 20x6 - US\$70,000 in 20X6-included as prepayment under trade and other receivables at 31 December 206 In addition a machine was purchased in February 20X6 for US\$ 30,000 to assist in the research project. The company normally depreciates machinery over five years on a straight line basis, a full year depreciation being charged in the year of purchase. In view of the successful reserach development, no depreciation has been charged in respect of this machine. Non Current Assets Held for Sale ABC Limited own printing equipment which decided by management to be exchange with new machine with bigger capacity. The equipment would have a limited second hand market locally but is readily salable, by an agent, to buyers in the Far east. The agent has already identified an interested buyer. The equipment which has not been revalued, has a net book value at 31 December 20X6 of US\$500,000 and, on sale, is estimated to realized US\$250,000 before deduction of the agent's fee of 10% of the sale price. The equipment has not been used since beginning of December 206 since it has been replaced by the new printing equipment