Aqua Africa acquired a plant near the sea on 1 January 2021, at a cost of...

 

Transcribed Image Text:

Aqua Africa acquired a plant near the sea on 1 January 2021, at a cost of R75 000 000, which it will use to desalinate sea water. Desalination is the process by which salts and minerals are removed from sea water in order to convert it into water suitable for human consumption and irrigation. Aqua Africa is obligated by the local municipal laws to restore the sea shore (land) at the end of the plant's useful life of 30 years. On the date of acquisition of the plant, an independent valuator estimated the restoration costs to be R5 300 000 (at the end of the plant's useful life). As per the independent valuator, this estimated cost of restoration remained the same throughout the current financial year ended 31 December 2021. The plant was used from its acquisition date. Equipment On 15 June 2021, Aqua Africa purchased a new, revolutionary industrial water purification machine (equipment) from a supplier in China for ¥35 000 cash, and the risks and rewards of ownership passed to Aqua Africa on this date. Delivery and handling fees amounted to R12 500 and further installation costs relating to the machine amounted to R3 500. These costs were paid in cash on 1 July 2021. The machine was installed on 1 July 2021 and it was available for use from this date. The machine was expected to have a useful life of 10 years and a residual value of R8 000 at the end of its useful life. The machine was only brought into use after a ribbon- cutting mini-ceremony by Aqua Africa's CFO on 15 July 2021. Strike at Aqua Africa From 1 September 2021 to 15 September 2021, workers at Aqua Africa embarked on a strike, demanding an increase in their wages and salaries. During this time, production was halted and all the plant and equipment were left idle. ANNEXURE F: FORMATIVE ASSESSMENT 1 Additional information: ● ● ● Exchange rates are as follows: 15 June 2021 1 July 2021 15 July 2021 Average for 2021 Exchange rates: 1¥:R 2.20 2.30 2.20 2.15 Aqua Africa uses the cost model for subsequent measurement of property, plant and equipment and depreciates all its property, plant and equipment on a straight- line basis. There were no changes in the useful lives of the assets identified during the end of ● ● Aqua Africa uses the cost model for subsequent measurement of property, plant and equipment and depreciates all its property, plant and equipment on a straight- line basis. There were no changes in the useful lives of the assets identified during the end of the financial year review of the estimated useful lives. The annual market interest rate (discount rate) is 10%. REQUIRED: 1.1) Discuss with reference to IAS 37, whether or not the cost of restoring the land should be recognised as a provision in the books of Aqua Africa. No calcula- tions are required. (15 marks) 1.2) Prepare the general journal entries to account for the all the transactions relat- ing to the plant, the restoration costs and the equipment (machine) in the rec- ords of Aqua Africa for the financial year ended 31 December 2021. Dates are required but narrations are not required. Ignore VAT and Income tax. (25 marks) Aqua Africa acquired a plant near the sea on 1 January 2021, at a cost of R75 000 000, which it will use to desalinate sea water. Desalination is the process by which salts and minerals are removed from sea water in order to convert it into water suitable for human consumption and irrigation. Aqua Africa is obligated by the local municipal laws to restore the sea shore (land) at the end of the plant's useful life of 30 years. On the date of acquisition of the plant, an independent valuator estimated the restoration costs to be R5 300 000 (at the end of the plant's useful life). As per the independent valuator, this estimated cost of restoration remained the same throughout the current financial year ended 31 December 2021. The plant was used from its acquisition date. Equipment On 15 June 2021, Aqua Africa purchased a new, revolutionary industrial water purification machine (equipment) from a supplier in China for ¥35 000 cash, and the risks and rewards of ownership passed to Aqua Africa on this date. Delivery and handling fees amounted to R12 500 and further installation costs relating to the machine amounted to R3 500. These costs were paid in cash on 1 July 2021. The machine was installed on 1 July 2021 and it was available for use from this date. The machine was expected to have a useful life of 10 years and a residual value of R8 000 at the end of its useful life. The machine was only brought into use after a ribbon- cutting mini-ceremony by Aqua Africa's CFO on 15 July 2021. Strike at Aqua Africa From 1 September 2021 to 15 September 2021, workers at Aqua Africa embarked on a strike, demanding an increase in their wages and salaries. During this time, production was halted and all the plant and equipment were left idle. ANNEXURE F: FORMATIVE ASSESSMENT 1 Additional information: ● ● ● Exchange rates are as follows: 15 June 2021 1 July 2021 15 July 2021 Average for 2021 Exchange rates: 1¥:R 2.20 2.30 2.20 2.15 Aqua Africa uses the cost model for subsequent measurement of property, plant and equipment and depreciates all its property, plant and equipment on a straight- line basis. There were no changes in the useful lives of the assets identified during the end of ● ● Aqua Africa uses the cost model for subsequent measurement of property, plant and equipment and depreciates all its property, plant and equipment on a straight- line basis. There were no changes in the useful lives of the assets identified during the end of the financial year review of the estimated useful lives. The annual market interest rate (discount rate) is 10%. REQUIRED: 1.1) Discuss with reference to IAS 37, whether or not the cost of restoring the land should be recognised as a provision in the books of Aqua Africa. No calcula- tions are required. (15 marks) 1.2) Prepare the general journal entries to account for the all the transactions relat- ing to the plant, the restoration costs and the equipment (machine) in the rec- ords of Aqua Africa for the financial year ended 31 December 2021. Dates are required but narrations are not required. Ignore VAT and Income tax. (25 marks)

Answer rating: 100% (QA)

11 According to IAS 37 Provisions Contingent Liabilities and Contingent Assets a provision should be recognized when There is a present obligation leg... View the full answer