You are the financial controller of Ballance plc and you have just emerged from a meeting with the Financial Director. There are a number of items in the accounts for the year ending 31 December 2012 that he is uncertain about, and he has asked you to prepare a report advising on their treatment in the accounts for 2012. The items are:
i) On 30 June 2012 Ballance plc purchased Machine A costing £1m made up as follows:
Manufacturer’s list price 1,000,000
Less: 10% Trade discount (100,000)
Delivery charge 6,400
Installation and testing charges 30,900
Minor spare parts 5,700
Service contract to 30 June 2015 57,000
The machine is estimated to have a 10 year useful life. (20 marks)
ii) Machine B was purchased 13 June 2009 for £600,000 and estimated to have a 10 year useful life. Following a review of asset lives on 30 June 2012 the remaining estimated useful life was revised to 4 years. (15 marks)
iii) Building X and building Y were both purchased 5 years ago for £1m each and were estimated to have useful lives of 50 years at acquisition. Building X is used in the business of Ballance plc whereas building Y is an investment property. Ballance uses the fair value method as allowed by IAS40 to value investment properties.
As at 31 December 2011 both buildings were valued at £2m each and these valuations were reflected in the accounts for that year. Remaining useful lives of both buildings were revised to 50 years at that date.
At 31 December 2012 both buildings were valued at £2.5m each. These valuations are to be reflected in the accounts. (25 marks)
Ballance plc provides depreciation on a straight line basis charging one month depreciation for each complete month of ownership.
Required: Prepare a report for the Financial Director which must include:
a) Your advice as to how each asset should be dealt with in the accounts including an estimate of the carrying value of each asset as at 31 December 2012, and an estimate of any expenditure, relating to these assets, charged to the income statement for the year ending 31 December 2012. In addition any movements on relevant reserves should be quantified. (60 marks)
b) A short summary comparing and contrasting the different treatments adopted for the two buildings. (30 marks)
Your answer to parts (a) and (b) should refer to International Financial Reporting Standards where necessary.
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