Practice Question 1

On 1 October 20X6, Omega began the construction of a new factory. Costs relating to the factory, incurred in the year ended 30 September 20X7, are as follows: $000 Purchase of the land Costs of dismantling existing structures on the site Purchase of materials to construct the factory Employment costs (Note 1) Production overheads directly related to the construction (Note 2) Allocated general administrative overheads Architects and consultants fees directly related to the construction Costs of relocating staff who are to work at the new factory Costs relating to the formal opening of the factory Interest on loan to partly finance the construction of the factory (Note 3) 10,000 500 6,000 1,800 1,200 600 400 300 200 1,200

Note 1 The factory was constructed in the eight months ended 31 May 20X7. It was brought into use on 30 June 20X7. The employment costs are for the nine months to 30 June 20X7.

Note 2 The production overheads were incurred in the eight months ended 31 May 20X7. They included an abnormal cost of $200,000, caused by the need to rectify damage resulting from a gas leak.

Note 3 Omega received the loan of $12m on 1 October 20X6. The loan carries a rate of interest of 10% per annum.

Note 4 The factory has an expected useful economic life of 20 years. At that time the factory will be demolished and the site returned to its original condition. This is a legal obligation that arose on signing the contract to purchase the land. The expected costs of fulfilling this obligation are $2m. An appropriate annual discount rate is 8%.

Requirement Compute the initial carrying value of the factory.

Practice Question 2
On 1 March 2013 Yucca acquired a machine from Plant under the following terms: $ List price of machine Import duty Delivery fees Electrical installation costs Pre-production testing Purchase of a five-year maintenance contract with Plant 82,000 1,500 2,050 9,500 4,900 7,000

In addition to the above information Yucca was granted a trade discount of 10% on the initial list price of the asset and a settlement discount of 5% if payment for the machine was received within one month of purchase, Yucca paid for the plant on 25 March 2013.

Required How should the above information be accounted for in the financial statements?

Practice Question 3
Construction of Deb and Ham s new store began on 1 April 2012. The following costs were incurred on the construction: $000 Freehold land Architect fees Site preparation Materials Direct labour costs Legal costs General overheads 4,500 620 1,650 7,800 11,200 2,400 940

The store was completed on 1 January 2013 and brought into use following its grand opening on the 1 April 2013. Deb and Ham issued a $25m unsecured loan on 1 April 2012 to aid construction of the new store (which meets the definition of a qualifying asset per IAS 23). The loan carried an interest rate of 8% per annum and is repayable on 1 April 2016. Required Calculate the amount to be included as property, plant and equipment in respect of the new store and state what impact the above information would have on the statement of profit or loss for the year ended 31 March 2013.