C & R plc is a large company which operates a number of retail stores throughout the United Kingdom. The company makes up financial statements to 30 September each year.
On 1 October 1996 the company purchased two plots of land at two different locations, and commenced the construction of two retail stores. The construction was completed on 1 October 1997.
Details of the costs incurred to construct the stores are as follows:
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Location A £000
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Location B £000
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Cost of land
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500
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700
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Cost of building materials
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500
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550
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Direct labour
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100
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150
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Site overheads
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100
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100
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Fixtures and fittings
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200
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200
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The construction of the stores was financed out of the proceeds of issue of a £10 million zero coupon bond on 1 October 1996. The bond is redeemable at a price of £25 937 000 on 30 September 2006. This represents the one and only payment to the holders of the bond.
Both stores were brought into use on 1 October 1997. The store at Location A was used by C & R plc but, due to a change of plan, the store at Location B was let to another retailer at a commercial rent.
It is the policy of C & R plc to depreciate freehold properties over their anticipated useful life of 50 years, and to depreciate fixtures and fittings over 10 years. The cost of such proper- ties (including fixtures and fittings) should include finance costs, where this is permitted by the regulatory framework in the United Kingdom.
Requirements
(a) Compute the amounts which will be included in fixed assets in respect of the stores at Locations A and B on 30 September 1997. Give full explanations for the amounts you have included.
(b) Compute the charge to the profit and loss account for depreciation on the fixed assets at the two locations for the year to 30 September 1998, stating clearly the reasons for your answers.