Reference no: EM132538549

On 1 July 2016, your company began the construction of a new furniture manufacturing workshop (factory). Costs relating to the factory, incurred in the year ended 7 July 2017, are as follows:

Birr (000)

Purchase of the land from land owner (assumed) 10,000

Costs of dismantling existing structures on the site 400

Purchase of materials to construct the factory 6,000

Employment training costs (Note 1) 900

Production overheads directly related to the construction (Note 2) 1,200

General administrative overheads 600

Architects' and consultants' fees directly related to the construction 400

Costs of relocating staff who are to work at the new factory 300

Interest on loan during the year related to construction of the

factory (Note 3) 200

Total cost incurred related to the work shop 20,000

Note 1

The factory workshop was constructed and completed on month ended 28 February 2017. It was brought into use on 31March 2017 and the monthly training cost was equal for the year.

Note 2

The production overheads were incurred during construction included an abnormal cost of 200,000, caused by the need to rectify damage resulting from a gas leak.

Note 3

The company received the loan of 2 million on 1 October 2016. 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 2 million. The present value of 2 million at bank annual interest rate of 8% is 430,000 birr.

Requirement

Question 1. Compute the initial carrying value of the factory and classify and record the cost of property.

Question 2. Determine the carrying value at the end of the year. (Assume deprecation rate: Straight line method with no salvage value)