Caspian Pty Ltd is a business that manufactures and sells water filters. The business was established...

 

Transcribed Image Text:

Caspian Pty Ltd is a business that manufactures and sells water filters. The business was established in 2013 and has grown to a large proprietary company with four owners: Olivia, Elliot, Alexandra and John. The business operates from a large factory in Melbourne and is registered for Goods and Services Tax (GST) with financial year end on 30 June. When it commenced its operations on 5 February 2013, Caspian was not able to purchase a building to manufacture water filters in and instead rented a factory. As the business has grown, the owners are considering purchasing the following assets for $440,000 (GST Inclusive) on 1 July 2021: Asset Land Building Equipment Total Fair value of asset $120,000 $330,000 $30,000 $480,000 Purchasing these assets would involve additional costs: legal fees of $5,500 (GST Inclusive) to register the land in business' name: $6,600 (GST Inclusive) to rewire the building: $4,840 (GST Inclusive) for a one year building insurance: $2,200 (GST Inclusive) to conduct a safety inspection of the equipment. In addition, the building will include the following necessary (not optional) fixture and fittings costs to ensure that the site is in a workable condition: $11,000 (GST Inclusive) to install solar panels: $12,100 (GST Inclusive) to install a surveillance system: $16,500 (GST Inclusive) to install a cooling/heating system. The building is expected to have a useful life of 20 years and an estimated residual value of $60,000. The equipment is expected to have a useful life of 5 years and be used for 10,000 hours and an estimated residual value of $4,000. The equipment is expected to be used for 1,500 hours in year 1, 2,200 hours in year 2, 2,500 hours in year 3, 2,000 hours in year 4, and 1,800 hours in year 5. Caspian adopts the cost model to measure all existing non-current assets. Because the business has seen a significant increase in demand for its products due to the pandemic in recent months, the owners believe existing non-current assets should be valued higher and it would be more appropriate to change to the revaluation model of measuring non-current assets. Question 1: Determine the amounts to be recorded in the balance sheet if Caspian were to acquire land, building and equipment on 1 July 2021. Consider any additional amounts that need to be included in the cost of the land, building and equipment and justify why or why not they should be included. Show your calculations in a table in the appendix (the appendix is not counted in the word count). Question 2: Calculate the annual depreciation expense over the life of both the building and equipment using all 3 methods of depreciation (where possible), starting with year 1 ending 30 June 2022. For the building and equipment, select the method of depreciation you would advise the owners to use and justify your selection. To perform the above calculations, use "Template for Financial Modelling PPE provided in Week 5 folder. You must use formulas in Excel to obtain the answers. Take screen shots of your template that show the answers and Excel formulas that you used and insert them directly in question 2 answer. Question 3: Explain why the owners of Caspian would like to change the method of measuring noncurrent assets during the pandemic. Discuss how changing the measurement of non-current assets from the cost model to the revaluation model influences the usefulness of financial information with reference to the fundamental qualitative characteristics of information prescribed by the Conceptual Framework for financial reporting. Caspian uses high-quality components in manufacturing of its water filters. However, some manufacturing defects are unavoidable. For the year ended 30 June 2021, Caspian recorded $950,000 of net sales. Based on prior period, around 1% of net sales are claimed as warranties. The owners believe the warranty amount should be expensed in the period when the claims take places which is normally in the period following the sale. Caspian Pty Ltd is a business that manufactures and sells water filters. The business was established in 2013 and has grown to a large proprietary company with four owners: Olivia, Elliot, Alexandra and John. The business operates from a large factory in Melbourne and is registered for Goods and Services Tax (GST) with financial year end on 30 June. When it commenced its operations on 5 February 2013, Caspian was not able to purchase a building to manufacture water filters in and instead rented a factory. As the business has grown, the owners are considering purchasing the following assets for $440,000 (GST Inclusive) on 1 July 2021: Asset Land Building Equipment Total Fair value of asset $120,000 $330,000 $30,000 $480,000 Purchasing these assets would involve additional costs: legal fees of $5,500 (GST Inclusive) to register the land in business' name: $6,600 (GST Inclusive) to rewire the building: $4,840 (GST Inclusive) for a one year building insurance: $2,200 (GST Inclusive) to conduct a safety inspection of the equipment. In addition, the building will include the following necessary (not optional) fixture and fittings costs to ensure that the site is in a workable condition: $11,000 (GST Inclusive) to install solar panels: $12,100 (GST Inclusive) to install a surveillance system: $16,500 (GST Inclusive) to install a cooling/heating system. The building is expected to have a useful life of 20 years and an estimated residual value of $60,000. The equipment is expected to have a useful life of 5 years and be used for 10,000 hours and an estimated residual value of $4,000. The equipment is expected to be used for 1,500 hours in year 1, 2,200 hours in year 2, 2,500 hours in year 3, 2,000 hours in year 4, and 1,800 hours in year 5. Caspian adopts the cost model to measure all existing non-current assets. Because the business has seen a significant increase in demand for its products due to the pandemic in recent months, the owners believe existing non-current assets should be valued higher and it would be more appropriate to change to the revaluation model of measuring non-current assets. Question 1: Determine the amounts to be recorded in the balance sheet if Caspian were to acquire land, building and equipment on 1 July 2021. Consider any additional amounts that need to be included in the cost of the land, building and equipment and justify why or why not they should be included. Show your calculations in a table in the appendix (the appendix is not counted in the word count). Question 2: Calculate the annual depreciation expense over the life of both the building and equipment using all 3 methods of depreciation (where possible), starting with year 1 ending 30 June 2022. For the building and equipment, select the method of depreciation you would advise the owners to use and justify your selection. To perform the above calculations, use "Template for Financial Modelling PPE provided in Week 5 folder. You must use formulas in Excel to obtain the answers. Take screen shots of your template that show the answers and Excel formulas that you used and insert them directly in question 2 answer. Question 3: Explain why the owners of Caspian would like to change the method of measuring noncurrent assets during the pandemic. Discuss how changing the measurement of non-current assets from the cost model to the revaluation model influences the usefulness of financial information with reference to the fundamental qualitative characteristics of information prescribed by the Conceptual Framework for financial reporting. Caspian uses high-quality components in manufacturing of its water filters. However, some manufacturing defects are unavoidable. For the year ended 30 June 2021, Caspian recorded $950,000 of net sales. Based on prior period, around 1% of net sales are claimed as warranties. The owners believe the warranty amount should be expensed in the period when the claims take places which is normally in the period following the sale.

Answer rating: 100% (QA)

1 Caspian Pty Ltd is considering the purchase of land building and equipment on 1 July 2021 The following table shows the amounts to be recorded in the balance sheet The costs that need to be included ... View the full answer