Reference no: EM131752432
Question: Alpine Pte Ltd is a company engaged in the manufacture and sale of ink cartridges. Its financial year end falls on 31 December.
On 1 January 20X7, the company acquired a completed building for $2 million. The building will be used for warehousing purposes. Before signing the purchase agreement, Alpine managed to negotiate a 10% special discount on the original contract price. Other items in relation to the building were as follows:
Bank loan to finance the purchase: $1,500,000
Annual interest on bank loan taken to buy the building : $180,000
Legal fees in relation to the building purchase : $250,000
Property agent fees paid: $20,000
Annual property insurance premium: $5,000
Annual cleaning and sundry repair costs of the building : $16,000
For buildings accounted as property, plant and equipment, the company depreciates the building using the straight-line method over its estimated useful life of 25 years with no residual value.
On 31 December 20X7 and 31 December 20X8, the building was valued at $2.6 million and $2.5 million respectively based on valuations done by BG Pte Ltd, an independent firm of valuers. On 1 June 20X9, the building was sold for cash proceeds of $2.8 million. Where assets are disposed of during the year, the depreciation charge for the year is pro-rated.
Required: (a) Give reasons why the building should be capitalised in the accounts and be accounted for as a property under Singapore Financial Reporting Standards 16 (FRS 16).
(b) Calculate the total cost of the building to be capitalised as at 1 January 20X7. Justify your answer.
(c) Assuming that the company adopts the cost model per FRS 16, prepare the necessary journal entries on 1 January 20X7, 31 December 20X7, 31 December 20X8 and 1 June 20X9. State your answers in dollars.
(d) Define fair value in accordance with FRS 16.
(e) Assuming that the directors decide to revalue the building on 31 December 20X8, explain if the revaluation is in accordance with FRS 16.
(f) Assuming the directors adopt the revaluation model per FRS 16 and decides to revalue the building on 31 December 20X8, prepare the necessary journal entries relating to the building on 31 December 20X8 as well as its disposal on 1 June 20X9. State your answers in dollars.