You are the financial Director of a sanitizer and chemicals production company XYZ Limited. XYZ Limited has
Question:
You are the financial Director of a sanitizer and chemicals production company XYZ Limited. XYZ Limited has a year-end of 30 June. The company is based in Windhoek and has access to the following data for the fiscal year that concluded on 30 June 2021, regarding its numerous properties, plants, and
equipment:
1. XYZ Company self-constructed its manufacturing plant, which became available for use on 1 January 20.18. The detail of the construction costs incurred on specific dates is as follows:
Date Type of Cost Cost Incurred
1 October 20.16 Construction costs 1 200 000.00
1 March 20.17 Construction costs 900 000.00
1 September 20.17 Construction costs 900 000.00
30 October 20.17 Cleaning of plant 150 000.00
Total 3 150 000.00
Manufacturing did not start until 1 February 20.18, following extensive testing of the facility in November 20.17 and December 20.17. Testing cost N$200 000, which was dispersed over the course of two months. The plant was predicted to have an eight-year useful life and a residual value of N$150,000.
These estimates have never needed to be changed. Because of a decline in the demand for sanitizers during the preceding fiscal year, the recoverable
amount of the plant was N$1 800 000 as of June 30, 2020. The demand for sanitizers surged significantly because of the global COVID 19 pandemic, and as of June 30, 2022, the recoverable amount was re- evaluated to be N$2,000,000. XYZ Company accounts for manufacturing plant in accordance with the
Cost Model and depreciates it over its useful life.
2. On July 1, 2016, XYZ Limited purchased a property in Okahandja. XYZ Limited using a revaluation approach based on the fair market value of property takes owner-occupied land and buildings into consideration. Since the fair values of the property was close to their carrying amounts in previous years, the first revaluation was carried out on 30 June 2022 only. Depreciation that had accrued as of the revaluation date is subtracted from the asset's gross carrying value. Owner-occupied structures are depreciated throughout the course of their 8-year useful life in a straight line. Depreciation for the year is based on the most recent valuation and XYZ Limited uses the gross replacement method to account for revaluation.
The following information is available in respect of the cost and open market valuations of the property in Okahandja.
Information on the cost and market value of XYZ Limited Okahandja Property.
01-Jul-16 01-July-21 30-Jun-22
Cost Valuation Valuation
N$ N$ N$
Head office
Building 2 000 000 2 200 000 2 800 000
Fair value is determined in a principal market of a willing buyer and a willing seller.
3. The revaluation surplus is transferred to retained earnings as the buildings are used.
4. Ignore any TAX implications.
REQUIRED:
a) Calculate the original cost of the manufacturing plant 8
b) Calculate the impairment as well as possible reversal of such impairment In respect of the manufacturing plant for the years ended 30 June 2021 and 30 June 2022 7
c) Provide the Journal entries in respect of the factory for the year ended 30 June 2022 15.
d) Prepare the revaluation surplus column, as it would appear in the statement of changes in equity for the year ended 30 June 2022.
Corporate Finance
ISBN: 978-0077861759
10th edition
Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe