Reference no: EM133206550

Question 1 IAS16- Property, Plant and Equipment

Accounting standard IAS16: Property, Plant and Equipment make a number of recognition, measurement and disclosure requirements with regard to tangible non-current assets.

The term "non-current asset" is defined in accounting standard IAS1: Presentation of Financial Statements. The information given below relates to two companies, both of which prepare accounts by 31 December.

Tom Limited:
Joy Plc bought a factory machine on 30 June 2020 and paid a total of £420,000. The supplier's invoice showed that this sum was made up of the following items:

Jerry Limited:
On 1 January 2010, Jerry Ltd bought freehold property for £800,000. This figure was made up of land £300,000 and buildings £500,000. The land was non-depreciable but it was decided to depreciate the buildings on a straight-line basis, assuming a useful life of 40 years and a residual value of £nil. On 1 January 2020, the land was revalued at
£400,000 and the buildings were revalued at £450,000. The company decided to incorporate these valuations into its accounts. The previous estimates of the buildings' useful life and residual value remain unchanged.

Required:
a) Distinguish between current assets and non-current assets, giving TWO examples of each type of asset.
b) Explain, with appropriate examples, the difference between capital expenditure and revenue expenditure.
c) If a company incorrectly classified an item of capital expenditure as revenue expenditure, what effect would this have on the company's accounts in the year of the expenditure and in subsequent years?
d) In accordance with the rules of IAS16, calculate the cost figure at which the machine bought by Tom Limited should initially be measured. Also, explain the correct accounting treatment of any component of the £420,000 expenditure which cannot be treated as part of the machine's cost.
e) Write journal entries for the revaluation of Jerry Limited's freehold property on 1 January 2020. Also, calculate the amount of depreciation which should be charged in relation to the buildings for the year to 31 December 2020.

a) In accordance with IAS 2 Inventories define the terms "inventories" and "net realisable value".
b) Explain how the cost of inventories should be determined and how inventories should be measured in accordance with IAS 2 Inventories.

Question 2: Sean Morris Plc
The main activity of Sean Morris Plc is to buy old motorcycles, which are sold after converting them into a saleable condition. On 30th September 2020, the end of the company's financial year, Sean Morris Plc had the following vehicles that were at various stages in the process of being converted to be ready for sale.

a) Expected selling expenses for each motorcycle are 4% of the expected selling price.
b) A quarter of the conversion costs are related to materials, but 16% of the cost of materials used in the conversions are considered to be abnormal wastage, due to a poor quality type of material that has been used.

Required:
Compute, in accordance with IAS 2 Inventories, the value at which the inventory of these motorcycles should be shown in the final accounts of Sean Morris Plc as at 30th September 2020. You are further required to determine the total cost of the abnormal wastage of material that has been incurred on the conversion of the four motorcycles.

Question 3: Danke Limited
Danke Limited manufactures patent wrist-watches. It carries an inventory of these and sells to wholesalers and retailers via a number of salespeople. The following expenses are charged in the pro?t and loss account:
a) Wages of Storemen and factory foremen
b) Salaries of Production manager, personnel of?cer, buyer, salespeople, sales manager, accountant, company secretary
c) Other: Directors' fees, rent and rates, electric power, repairs, depreciation, carriage outwards, advertising, bad debts, interest on bank overdraft, development expenditure for a new type of wrist-watches.

Required:
Which of these expenses can reasonably be included in the valuation of inventory?