Question 1
Amy Ltd uses cost model for own use property and fair value model for investment properties. It had the following properties at 31 December 2013, the end of the financial year.
|
|
Nature
|
Original cost ($'M)
|
Carrying amount ($'M)
|
|
Building 1
|
Investment property
|
18
|
50
|
|
Building 2
|
Investment property under construction
|
10
|
28
|
|
Building 3
|
Office building for own use
|
60
|
56
|
All three buildings were acquired in July 2010 with estimated useful life of 50 years and zero residual value. Depreciation is calculated on a monthly basis and started in July 2010.
Amy Ltd carried out the following activities in 2014:
Relocated the company headquarters from Building 3 to Building 1 on 1 April 2014 and the fair value of Building 1 on that day was $52M.
Refurnished Building 3 at a cost of $2M on 1 April. The refurnish work was completed on 31 May 2014 and then rented it out to HKSAR Government on 1 July 2014.
Completed the construction of Building 2 on 31 May 2014 with additional expenditure of $6M.
An external valuer has been appointed to perform a valuation for all the properties. The estimated fair values at 31 December 2014 are as follows:
|
|
31 December 2014 ($'M)
|
|
Building 1
|
54
|
|
Building 2
|
30
|
|
Building 3
|
80
|
The valuer did not revise the estimated useful life of the buildings after the valuation.
Required:
a) Explain the effect of the activities occurred during 2014 on the classification and the effective date for each of the properties of Amy Ltd.
b) What are the carrying amounts of the properties of Amy Ltd on 31 December 2014? Show your workings.
c) Prepare accounting journal entries for the three properties in 2014 and prepare an extract of statement of comprehensive income for the reporting period ended 31 December 2014 for the three properties.
Question 2
a) What is 'materiality' in accounting? What are the relationships between 'materiality' and 'relevance' in the conceptual framework for financial reporting?
b) David is an inexperienced investor of the stock market. He believes that if financial information to be useful, the information should be available for his use as soon as possible. Timely reporting is his greatest concern. He believes all other users should agree to his view.
Do you agree with David's view? Support your answer using the conceptual framework for financial reporting.
c) An inexperienced accountant had been reading some reports written by a qualified surveyor on the values of property (an office building used by the company) in Central. The accountant believed that annual increase in property price was more than the decrease in the carrying amount due to annual depreciation until a property had less than or equal to 15 years of remaining useful life. Therefore, the accountant suggested that company should adopt a policy of carrying its office building at cost until the remaining useful lives are 15 years and then depreciated them on a straight-line basis over 15 years. He believed that this count improve company profits and cash flows and showing a faithful representation of the value of the leasehold properties.
Do you agree with the accountant's suggestions? Explain.
Question 3
Luco Restaurant installed the start-of-the-art utensil washing machine in its kitchen on 1 February 2014. The details of this machine were:
|
|
HK$
|
|
List price of the utensil washing machine
|
120,000
|
|
Trade discount received 5% on list price
|
|
|
Ancillary costs:
|
|
|
Shipping and handling
|
1,100
|
|
Estimated pre-production testing
|
6,000
|
|
Maintenance contract for three years
|
12,000
|
|
Site preparation costs:
|
|
|
Water pipe installation
|
7,000
|
|
Concrete reinforcement
|
5,000
|
|
Own labour costs
|
3,000
|
Luco received early payment discount of 2% on the machine. In addition, Luco had incorrectly specified the drainage requirements of the original water pipe. The cost of correcting this error of $1,000 was included in the above figure of $7,000. The water pipe was still used by the utensil washing machine after the correction.
This utensil washing machine was expected to last for 10 years with $5,000 residual value. At the end of this period there will be compulsory cost of $10,000 to dismantle the machine and $2,000 to restore the kitchen to its original use condition.
The accounting policy of the Luco requires that full year depreciation using reducing balance method be charged in the financial year when non-current asset is first recognized.
Required:
a) Determine the initial cost of this utensil washing machine. Explain your calculations.
b) Provide the extracts of statement of financial position and the statement of profit or loss and other comprehensive income for Luco for the period ended 31 Dec 2014.
Show your workings.
Question 4
XYZ Ltd (XYZ) is a property developer and investment company. The directors decided to revalue all of their property, plant and equipment to fair value on 31 December 2014. The book values at 31 December 2014 before accounting for the revaluation and the fair value on that day were as follows:
|
|
Book values
|
Fair value
|
|
|
$'000
|
$'000
|
|
Oversea freehold land A acquired in Feb 2014 at cost
|
1,000
|
800
|
|
Oversea freehold land B at valuation 2010
|
1,500
|
3,500
|
|
Factory Building C acquired in Jan 2008 at cost
|
2,900
|
3,200
|
|
Factory Building C accumulated depreciation
|
(200)
|
|
|
Factory Building D at valuation 2010
|
5,000
|
4,000
|
|
FactoryBuilding D accumulated depreciation
|
(500)
|
|
|
FactoryBuilding D revaluation surplus
|
400
|
|
|
OfficeBuilding acquired in Jan 2013 at cost
|
7,000
|
8,000
|
|
OfficeBuilding accumulated depreciation
|
(1,200)
|
|
The remaining estimated useful life of the OfficeBuilding on 31 Dec 2014 after revaluation was 10 years.
Required:
a) Provide the extracts of statement of financial position and the statement of profit or loss and other comprehensive income for the assets of XYZ for the period ended 31 Dec 2014.
b) Suppose the OfficeBuilding was sold on 30 Jun 2015 for $7 million. Prepare the relevant journal entries with narratives to record the disposal transaction for the year ended 31 Dec 2015.