Semester 1 Week 6 Tutorial 4 Flashcards
Hydralux Limited (‘Hydralux’) have recently acquired a new office building, when they converted the former Grand Hotel in the centre of town. The financial controller of Hydralux has approached you with some of the costs associated with the new office building.
Purchase of building
Costs of conversion of former hotel.
Press advertising/PR on purchase.
Solicitor’s fee on purchase.
Opening party to celebrate purchase.
New fire control system.
Council planning permission fee.
Allocation of director time relating to project.
Outline which of these costs can and cannot be capitalised and why.
The purchase of the building, the costs of conversion, the solicitor’s fee and the council planning permission fee can all be capitalised. This is because they are direct costs to get the building to its current state and current location, for example it would be impossible to purchase the building without paying a solicitors fee or impossible to convert without arranging for planning permission.
The new fire control system should be capitalised as a health and safety item.
The press advertising and opening party should not be capitalised as they are not direct costs of the building. It would have been perfectly possible for the building to be in its current state and condition without paying these fees.
Likewise the directors’ time should not be capitalised as this is a general expense not a specific cost of the project. This time would have been incurred whether or not the directors were engaged on this project.
Pilrig Limited (‘Pilrig’) commenced construction of a new warehouse at the start of the year ended 31 December 2018. Pilrig is paying for the construction using a draw down loan facility which charges interest at an annual rate of 6.5%. Attached is details of the payments made in the year.
Calculate the amount of interest to be capitalised in the year to 31 December 2018.
First payment: £350,000 x 6.5% x 10/12 = £18,958
Rubble removal: £60,000 x 6.5% x 9/12 = £2,925
Second payment: £400,000 x 6.5% x 6/12 = £13,000
Total capitalised = £34,883
Note interest is charged from the date the payment is made from the drawdown facility, not the date the invoice is received. Accordingly there would be no interest charged on the final payment in this current year as although the invoice is received this year, payment is not made until the next.
Aberdare Ltd (‘Aberdare’) purchased properties costing £540,000 on 1 May 20X2. The properties are being depreciated straight line over their useful economic life of 50 years.
The properties are revalued as at 31 December 20X5, the year-end date of the company, with a fair value of £620,000. A full year’s depreciation is charged in the year of purchase and none in the year of sale.
Aberdare have a policy of amortising the revaluation reserve
Required:
- Prepare the journal entry to record the revaluation at 31 December 20X5.
- Calculate the net book value of the asset as at 31 December 20X6.
- Calculate the balance on the revaluation reserve as at 31 December 20X6.
As at 31 December 20X8 the building is now valued at £400,000. Prepare the journal entry necessary to deal with this valuation as at 31 December 20X8.
- Depreciation expense = Cost/useful life = £540,000/50 years = £10,800 p/a
Accumulated Depreciation £10,800 x 4 years (20X2, X3, X4, X5) = £43,200
Net book value at 31/12/X5 = cost – accumulated depreciation = £540,000 - £43,200
= £496,800
Revaluation gain = new cost – NBV = £620,000 - £496,800 = £123,200
Dr Land and buildings – cost 80,000
Dr Land and buildings – acc dep’n 43,200
Cr Revaluation Reserve 123,200
being revaluation of property
2.
Remaining useful life as at 31/12/X5 = 50 – 4 years = 46 years
Depreciation Based on Re-valued Amount: Revaluation Amount = new value/remaining useful life = £620,000/46 years = £13,478
NBV at 31/12/X6 = £620,000 - £13,478 = £606,522
3. Release from revaluation:
Revaluation Reserve/remaining useful life = £123,200/46 years = £2,678
OR
The difference between the new dep’n £13,478 and original dep’n of £10,800 is £2,678
Balance on Revaluation Reserve 20X6 = £123,200 - £2,678= £120,522.
Depreciation to 31/12/X8 = 3 x £13,478 = £40,434
NBV as at 31/12/X8 = £620,000 - £40,434 = £579,566
Revaluation reserve as at 31/12/X8 = £123,200 – (3 x £2,678) = £115,166
Note it would also be acceptable to take the figures as at 31/12/X6 from question 3 and take a further two years of depreciation.
Revaluation loss = new value – NBV = £400,000 - £579,566 = £179,566
Maximum that can be taken to revaluation reserve = £115,166
Therefore remainder (£179,566 - £115,166) to P/L = £64,400
Dr Revaluation reserve £115,166
Dr P/L loss £64,400
Dr buildings accumulated depreciation £40,434
Cr Buildings cost £220,000
Being revaluation loss on buildings
Nicki buys a delivery van in 20X7 for £20,500. The estimated useful life is 10 years and the estimated residual value is £500. Straight-line depreciation is to be used. After three years, the estimated remaining useful life is four years, due to the wear and tear being higher than expected. There is no estimated change to residual value.
Calculate and prepare the journal for the new depreciation.
Original depreciation expense = (£20,500 - £500)/10 years = £2,000/year
Four years depreciation = 3 x £2,000 = £6,000
NBV = £20,500 - 6,000 = £14,500
New depreciation = (£14,500-£500)/4 years = £3,500/year
Simons Limited (‘Simons’) has recently shut down its Newcastle factory, as such the building is empty and Simons is considering selling it. The financial controller of Simons has heard of the term “held for sale assets” and wants advice from you whether the building could be classed as a held for sale asset at the year end.
Prepare a briefing note for the financial controller detailing what conditions would need to be met for the asset to be a held for sale asset by the year end.
For the factory building to be a held for sale asset at the year end the following conditions would need to be met:
- The sale has been approved by the appropriate level of management
- The asset is actively marketed at a reasonable price
- The sale is expected within a year.
All of these conditions would need to be met for the asset to be classed as a held for sale asset.
Anderson Ltd (‘Anderson’) bought a property using cash during the year ended 31 March 20X1 for £200,000. On 31 March 20X6 the property was revalued at £830,000, and in May 20X8 the property was sold for £940,000. Anderson depreciates its property using 2% per annum straight line with a full year’s depreciation charged in the year of purchase, none in the year of sale. It is Anderson’s accounting policy to make annual transfers between the revaluation reserve and retained earnings.
Prepare the journal entries required in respect of Anderson’s property from the date of purchase through to the year of sale.
Dr buildings cost £200,000
Cr Bank £200,000
Being initial purchase of building
Initial depreciation = £200,000 x 2% = £4,000
So every year from 20X1 to 20X6 (inclusive) the following journal will be posted
Dr P/L depreciation £4,000
Cr buildings – accumulated depreciation £4,000
Being annual depreciation
By 31 March 20X6 6 years of depreciation have been charged accumulated depreciation is therefore 6 x £4,000 = £24,000 and NBV = £200,000 - £24,000 = £176,000
New value = £830,000
Therefore gain = £830,000 - £176,000 = £654,000
Dr Buildings cost £630,000
Dr Buildings – accumulated depreciation £24,000
Cr Revaluation reserve £654,000
Being revaluation of building
Remaining useful life = 44 years
Therefore new depreciation = £830,000/44 = £18,864
In 20X7 and 20X8
Dr P/L depreciation £18,864
Cr Buildings accumulated depreciation £18,864
Being annual depreciation of building
Annual transfer from revaluation reserve =
£654,000/44 years = £14,864
OR
New depreciation - old depreciation = £18,864 - £4,000 = £14,864
Journal in 20X7 and 20X8
Dr Revaluation reserve £14,864
Cr retained earnings £14,864
Being annual transfer
Note: The building is sold in May 20X8, as Anderson has a March year end, this means the sale happens in the year ended 31 March 20X9 and accordingly there is a full year’s depreciation in 20X8 and none in 20X9
Accumulated depreciation at point of sale = £18,864 x 2 = £37,728
NBV = £830,000 - £37,728 = £792,272
Gain = £940,000 - £792,272 = £147,728
Dr Bank £940,000
Dr buildings accumulated depreciation £37,728
Cr Buildings cost £830,000
Cr P/L gain on sale £147,728
Being sale of building
As the building is now sold the remaining revaluation reserve should be transferred to retained earnings
Remaining balance = £654,000 – (2 x £14,864) = £624,272
Dr Revaluation reserve £624,272
Cr Retained earnings £624,272
Being transfer of revaluation reserve on sale
