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Problems in IAS 16

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					                EXERCISES IN PROPERTY, PLANT & EQUIPMENT (IAS 16)

PROBLEM 1

Well oil owns a production platform in the Arabian Gulf.        The following costs have been
identified:

    Building costs charged by Scott Fabrication for the initial construction of the platform;
    Professional fees paid to Cromarty Marine Engineering, the engineering company that
     Wattoil paid to oversee the construction and manage the commissioning of the rig;
   Legal fees paid to Snoop, a law firm that specializes in international contract law for the
     oil industry, for the provision of legal services associated with purchasing the rig;
   Fees paid to Biglift barges for the cost of transporting the rig from its construction site on
     the North East coast of Scotland to its present location;
   Annual cost of repainting the rig with an anticorrosion coating;
   The cost of a major refit in years 5 and 10 of the platform’s life – these refits involve
     taking the rig off-line for several weeks and are necessary if the rig is to reach its
     estimated lifespan;
   The anticipated costs of removing the rig from its site and disposing of it in an
     environmentally responsible manner;
   Borrowing costs associated with the rig started when the company took out a twenty-
     year loan at the start of construction work, which lasted for five years, and continued for
     the term of the loan.
Required
  Classify the list of costs as capital or revenue according to IAS 16 & IAS 23.


PROBLEM 2

The company owns three factory buildings that have been shown at valuation less depreciation.
The factories were revalued at the end of the year:

    The Perth factory was purchased for £ 13 million. It was revalued four years ago at £15
     million and has since been depreciated by £500 000.
     The revaluation reserve includes £2.2 million in respect of this factory. The factory’s
     current value has been set at £17 million.
   The Glenrothes factory was purchased for £16 million. It was revalued three years ago
     at £17 million and has since been depreciated by £200 000. The revaluation reserve
     include£800 000 in respect of this factory. The factory’s current value has been set at
     £16.5 million.
   The Drymen factory was purchased for £12 million. It was revalued five years ago at
     £13million and has since been depreciated by £300 000.The revaluation reserve
     includes £200 000 in respect of this factory. The factory’s current value has been set at
     £8 million.
Required
  Determine the revaluation of PPE according to IAS 16?




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PROBLEM 3

 Major inspections of each aircraft in Ajax Airlines’ fleet are carried out every 12 to 18 months.
This involves taking the plane out of service for a period and using a specialized maintenance
crew to perform the inspection. AirplaneX5 requires an inspection every 18 months, for a total
cost of $100. How should the cost of the inspection be accounted for?
Does the cost of the inspection meet the definition of property, plant and equipment? Is it
probable that future economic benefits associated with the inspection will flow to the entity?
Can the cost of the inspection be reliably measured? (According to IAS 16)

PROBLEM 4

Lili Corp. acquires new equipment at a cost of $100 plus 7% sales tax and 5%GST.(GST is a
recoverable Canadian tax) The company paid $10 to transport the equipment to its plant. The
site where the equipment was to be placed was not yet ready and Lili Corp. spent another$5 for
one month’s storage costs. When installed, $3 of labor and $2 of materials were used to adjust
and calibrate the machine to the company’s exact specifications. The units produced in the trial
runs were subsequently sold to employees for $4. During the first two months of production, the
equipment was used only at 50% of its capacity. Labor costs of $30 and material cost of $20
were incurred in this production, while the units sold generated $ 55 of sales. Lili paid an
engineering consulting firm $ 11 for its services in recommending the specific equipment to
purchase and for help during the calibration phase. Borrowing costs of $ 1 were incurred
because of the one month delay in installation. What is the cost of the equipment according
IAS 16?

PROBLEM 5

Consider each of the assets described in (a) to (i) and indicate whether they are or are not
investment properties as defined in IAS 40:

   a) Land held for long-term capital appreciation rather than for short-term sale in the
      ordinary course of business.
   b) Land held for a currently undetermined future use.
   c) Property that is being constructed or developed for future use as investment use as
      investment property.
   d) A building owned by the reporting enterprise( or held by the reporting enterprise under a
      finance lease) and leased out under one or more operating leases.
   e) A building that is vacant but is held to be leased out under one or more operating leases.
   f) Property held for sale in the ordinary course of business , for example, property held for
      trading by property traders or for development and resale by property delevopers.
   g) Property being constructed for third parties.
   h) Owner-occupied property.
   i) Intangible assets associated with investment property, such as air rights and water
      rights.




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