Welloil 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 specialises 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.

Classify the list of costs as capital or revenue.

T plc is a quoted company that owns a large number of hotels. The company’s latest trial balance is as follows:

T plc
Trial balance as at 31 December 20X7
	£000	£000
Administrative expenses	3 000
Bank	300
Creditors		1 700
Distribution costs	4 000
Food purchases	2 100
Heating and lighting	3 000
Hotel buildings – cost	490 000
Hotel buildings – depreciation to date		46 200
Hotel fixtures and fittings – cost	18 000
Hotel fixtures and fittings – depreciation to date		9 400
Interest	5 950
Inventory as at 31 December 20X6	450
Loans (repayable 20Y0)		110 000
Retained profit		86 000
Sales of accommodation and food		68 500
Share capital (£1 shares, fully paid)		220 000
Wages – administrative staff	6 000
Wages – housekeeping and restaurant staff	9 000
	541 800	541 800

During the year, the company spent a total of £12.0 million on a new hotel and purchased new fixtures for £7.0 million. These acquisitions have been included in the relevant trial balance totals.

Hotels are to be depreciated by 2% of cost, and fixtures and fittings by 25% of the reducing balance, with a full year’s depreciation to be charged in the year of acquisition.

Closing stocks of foodstuffs and other consumables were valued at £470 000 on 31 December 20X7.

The directors are considering the implications of revaluing the company’s hotels. They have commissioned the following report:

	Original cost	Depreciation to 31.12.20X7	Market value to 31.12.20X7	Estimated useful life from 31.12.20X7
	£000	£000	£000	Years
Hotel A	800	180	1 300	50
Hotel B	700	120	850	30
Hotel C	1 000	140	650	40

Required:

1. Calculate the effects of the revaluation of the three hotels on the depreciation charge for the year ended 31 December 2007, assuming that a full year’s depreciation is charged on the revalued amounts, and
2. Prepare T plc’s statement of comprehensive income for the year ended 31 December 20X7 and its statement of financial position as at that date.
3. During the year ended 31 December 20X8, the directors are planning to start a major programme of repairs and refurbishment on the company’s hotels. Over a five-year period the buildings will be checked to ensure that they are structurally sound, and they will be repaired wherever necessary. Preliminary investigations suggest that some of the hotels will not achieve their expected useful lives if the company does not invest in this preventive maintenance. The company will also redecorate the hotels and replace most of the furniture in the bedrooms and restaurants. The redecoration will create a new corporate image for all of T plc’s hotels, and that will improve the company’s marketing and promotion.

Describe the factors that will have to be considered in deciding whether these costs should becapitalised.

Answer rating: 100% (QA)

Capital Costs are onetime costs incurred in the procurement construction and upgradation of fixed assets such as land buildings furniture machinery as ... View the full answer