Reference no: EM133177481

Question - On 1 October 20X5, DH began the construction of a new factory. Costs relating to the factory, incurred in the year ended 30 September 20X6, are as follows:

000

Purchase of the land 10,000

Costs of dismantling existing structures on the site 600

Purchase of materials to construct the factory 6,000

Employment costs (Note 1) 1,800

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

Allocated 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

Costs relating to the formal opening of the factory 200

Interest on loan to partly finance the construction of the factory (Note 3) 1,200

Note 1: The factory was constructed in the eight months ended 31 May 20X6. It was brought into use on 30 June 20X6. The employment costs are for the nine months to 30 June 20X6.

Note 2: The production overheads were incurred in the eight months ended 31 May 20X6. They included an abnormal cost of $200,000, caused by the need to rectify damage resulting from a gas leak.

Note 3: DH received the loan of $12m on 1 October 20X5. 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 $2m. An appropriate annual discount rate is 8%.

Required - Compute the initial carrying value of the factory and prepare an extract for profit and loss statement and statement of financial position for the year ended 31 May 20X6.