Question

Requiredi Advise Caba Limited on how the above transaction shouid be treated in its financial statements for the year ended 31 March 2016 in accordance with international accounting standards (10 marks) Question 2 A piece of machine was purchased on 1 January 2014 at a cost of K1,200,000. It s depreciated at 25% its economic useful life. It is company policy to review machines for impairment annually. was reviewed for impairment on 31 December 2014 and the following net e been estimated for the asset's remaining economic useful Wfe. cashflows hav Year Ending 31t December 2015 31st December 2016 31 December 2017 Net cash flows (K) 400,000 300,000 200,000 The company has a risk adjusted discount rate of 10% per annum. The depreciation and the results of the impaiment review are yet to be accounted for in the books of Medado Enterprises for the yea Required ing 3ls December 2014 Explain the treatment of the above event for the year ended 31 December 2014 Borrowing Cost Question 1 K800,000 on 1s January 2014 from Babana Bank. The loan nstruction of its office

question 2

question

Answer 1

Answer 1

Depreciation for the year ending 31st Dec, 2014 = (K) 1200000 x 25% = 300,000

WDV as on 31st Dec, 2014 of the machine =K 900,000

Present Value of Future Cash flows at Discount rate of 10 % = [400000/(1.1)¹] + [300000/(1.1)²] + [200000/(1.1)³] = K 761,833

Therefore,

Impairment Loss to be recorded for the year ending 31st Dec, 2014 = K 900,000 - K 761,833 = K 138,167.

Answer 2 (Borrowing Cost)

IAS 23 Borrowing Costs requires that borrowing costs directly attributable to the acquisition, construction or production of a 'qualifying asset' are included in the cost of the asset.

A qualifying asset is one that necessarily takes a substantial period of time to get ready for its intended use or sale.

If during the period of construction, the activities necessary to complete the asset are interrupted or suspended due to particular reasons, the borrowing cost of such period will be accounted for as follows:

• If the period of interruption is material, the borrowing cost of such period will not be capitalized and will be charged to statement of profit and loss as an expense.
• If the period of interruption is immaterial or temporary such as (Material shortage or labor strikes), then entity may continue to capitalize the borrowing cost during such period.
• The capitalization of the borrowing cost will cease, when activities necessary to complete the asset are finished i.e. the completion of the physical structure of the qualifying asset, although some administrative or decorative work may still continue.

In the given case,

The loan was taken on 1st Jan,2014 for the purpose of construction of office block of Namana Ltd. Therefore the borrowing cost to be incurred is eligible for capitalization.

However, the construction started from 1st April,2014 & is likely to be completed on 31st March,2016. Therefore interest incurred on loan taken during such period qualifies for capitalization. The interruption caused due to suspension of contruction workers on 30th Sep,2014 is considered or assumed to be temporary as the work resumed after 4 months on 1st January,2015. Thus, applying the principles of IAS 23, Namana Ltd may continue to capitalize the interest incurred during such period of suspension.

Total interest incurred during the year 2014 = K800,000 x 10% = K80,000

Total interest to be charged as expense in Statement of Profit & Loss = K80000 x 3/12 = K20,000.

Total interest to be capitalised with the cost of construction = K80,000 x 9/12 = K60,000.