UNIVERSITY OF GHANA BUSINESS SCHOOL

DEPARTMENT OF ACCOUNTING

LEVEL 300

FINANCIAL REPORTING 1
TUTORIAL SET 1
IAS 16 - PPE

Q1
A company buys a machine on 1st January 2017. The terms of the purchase are that the company
will pay GHS 5,000,000 for the machine on 31st December 2018. The appropriate discount rate is
6%. Determine the amount to be initially record as cost of the item and extract for the financial
statements as the end of 31st December 2017.

Q2
A piece of machinery has an annual service costing $10,000. During the most recent service it
was decided to replace part of the engineering meaning that it will work faster and produce more
units of product per hour. The cost of the replacement part is $20,000.
Would this expenditure be treated as capital or revenue expenditure?

Q3
An entity revalues its buildings and decides to incorporate the revaluation into its
financial statements.
Extract from the statement of financial position at 31 December 2017:

Buildings:
Cost 1,200,000
Depreciation (144,000)
–––––
1,056,000
–––––
The building is revalued at 1 January 2018 at GHS 1,400,000. Its useful life is 40 years at that
date.
Show the relevant extracts from the financial statements at 31 December 2018.
Q4
On 1 April 2018 the fair value of Xu's property was $100,000 with a remaining life of 20 years.
Xu’s policy is to revalue its property at each year end. At 31 March 2019 the property was
valued at $86,000. The balance on the revaluation surplus at 1 April 2018 was $20,000 which
relates entirely to the property.
Xu does not make a transfer to realized profit in respect of excess depreciation.
Required:
1 Prepare extracts of Xu's financial statements for the year ended 31 March 2019 reflecting
the above information.
2 State how the accounting would be different if the opening revaluation surplus did not
exist.

Q5
An entity revalued its land and buildings at the start of the year to $10 million ($4 million for the
land). The property cost $5 million ($1 million for the land) ten years prior to the revaluation.
The total expected useful life of 50 years is unchanged. The entity's policy is to make an annual
transfer of realized amounts to retained earnings. Show the effects of the above on the financial
statements for the year.

Q6
Derek purchased a property costing $750,000 on 1 January 2014 with a useful economic life of
10 years. It has no residual value. At 31 December 2014 the property was valued at $810,000
resulting in a gain on revaluation being recorded in other comprehensive income of $135,000.
There was no change to its useful life. Derek does not make a transfer to realized profits in
respect of excess depreciation on revalued assets. On 31 December 2016 the property was sold
for $900,000.
Required:
How should the disposal on the previously revalued asset be treated in the financial statements
for the year ended 31 December 2016?
Q7

On 1 October 2005 Dearing acquired a machine under the following terms:

Manufacturer’s base price 1,050,000

Trade discount (applying to base price only) 20%

Early settlement discount taken (on the payable amount of the base 5%
cost only)

Freight charges 30,000

Electrical installation cost 28,000

Staff training in use of machine 40,000

Pre-production testing 22,000

Purchase of a three-year maintenance contract 60,000

Estimated residual value 20,000

Estimated life in machine hours 6,000

Hours used – year ended 30 September 2006 1200

year ended 30 September 2007 1,800

– year ended 30 September 2008 (see below) 850

On 1 October 2007 Dearing decided to upgrade the machine by adding new components at a cost
of $200,000. This upgrade led to a reduction in the production time per unit of the goods being
manufactured using the machine. The upgrade also increased the estimated remaining life of the
machine at 1 October 2007 to 4,500 machine hours and its estimated residual value was revised
to $40,000.

Required:
Prepare extracts from the income statement and statement of financial position for the
above machine for each of the three years to 30 September 2008.
Q8
Binkie Co has an item of land carried in its books at GHS13,000. Two years ago a slump in land
values led the company to reduce the carrying value from GHS15,000. This was taken as an
expense in profit or loss for the year. There has been a surge in land prices in the current year,
however, and the land is now worth GHS20,000.
a) Account for the revaluation in the current year
b) The original cost was GHS15,000, revalued upwards to GHS20,000 two years ago. The value
has now fallen to GHS13,000

Q9
Crinckle Co bought an asset for GHS10,000 at the beginning of 20X6. It had a useful life of five
years. On 1 January 20X8 the asset was revalued to GHS12,000. The expected useful life has
remained unchanged (ie three years remain).
Account for the revaluation and state the treatment for depreciation from 20X8 onwards

Q10
Esinam Ltd owns an asset with an original cost of GHC200,000. On acquisition, management
determined that the useful life was 10 years and the residual value would be GHC20,000. The
asset is now 8 years old, and during this time there have been no revisions to the assessed
residual value. At the end of year 8, management has reviewed the useful life and residual value
and has determined that the useful life can be extended to 12 years in view of the maintenance
program adopted by the company. As a result, the residual value will reduce to GHC10,000.

required
Account for this review of estimated useful life and estimated residual value.

Q11
A company has purchased a large item of plant. The following costs were incurred:
List price of machine 1,000,000
Trade discount 50,000
Delivery cost 100,000
Installation cost 125,000
Cost of site preparation 200,000
Architect fees 15,000
 Administration expense 150,000
Test run cost 75,000
The test run cost was to ensure that the asset was installed and working correctly. Items of
inventory were produced during the test run. These had a sale value of GH10,000.
Local government officials have granted the company a license to operate the asset on condition
that the company will remove the asset and return the site to its former condition at the end of the
asset’s life. The company has recognized a liability of GHS 250,000 in respect of the expected
clearance cost.
Required
Determine the initial amount to be recognized as cost of the PPE.
Q12
A shipping company is required to put its ships into dry dock every three years for an overhaul,
at a cost of GHS 3,000,000. The ships have a useful life of 20 years. A ship is purchased from a
shipbuilder at a cost of GHS 200,000,000.
Determine the initial amount to be recognized and its subsequent treatment.

Q13
Cap bought a building on 01/01/2001. The purchase price was GHS 2,900,000, associated legal
fees were GHS 100,000 and general administrative cost allocated to the purchase were 200,000.
Cap also paid sales tax of 500,000 which was recovered from the tax authorities. The building
was attributed a useful economic life of 50 years. It was revalued to 4,600,000 on 31/12/2004
and was sold for 5,000,000 on 31/12/2005.
Cap purchased a machine on 01/01/2003 for GHS 100,000 and attributed it with a useful life of
10years. On 01/01/2005 cap reduced the estimated remaining useful life to 4 years.
Required:
Explain how the above items of PPE would have been accounted for in all relevant reporting
periods up until 31/12/2005.
Q14
A lorry bought for business cost GHS 17,000. It is expected to last for five years and then be
sold for scrap for GHS 2000. Usage over the five years is expected to be:
Year 1 200 days
Year 2 100 days
Year 3 100 days
Year 4 150 days
Year 5 40 days

Required:
Work out the depreciation to be charged each year under:

a) The straight line method b) Reducing balance method using a rate of 35% c) The
machine hour method d) The sum of the digits method
Assignment

Q1

The following details relate to two items of property, plant and equipment (A and B) owned by
Delta which are depreciated on a straight-line basis with no estimated residual value:

At 31 March 2014 item A was still in use, but item B was sold (on that date) for GHS70 million.

Note: Delta makes an annual transfer from its revaluation surplus to retained earnings in respect
of excess depreciation.

Required:

Prepare extracts from:

(i) Delta’s statements of profit or loss for the years ended 31 March 2013 and 2014 in respect
of charges (expenses) related to property, plant and equipment;

(ii) Delta’s statement of financial position as at 31 March 2013 and 2014 for the carrying
amount of property, plant and equipment and the revaluation surplus
Question 2
An entity started construction on a building for its own use on 1st April 2017 and incurred the
following costs:
Purchase price of land 250,000,000

Stamp duty 5,000,000

Legal fees 10,000,000

Site preparation and clearance 18,000,000

Materials 100,000,000

Labour (1st April 2017 to 1st July 150,000,000

2018)

Architect fees 20,000,000

General overheads 30,000,000

The following information is relevant:

Material costs were greater than anticipated. On investigation, it was found that materials costing
GHS 10 million had been spoiled and therefore wasted and a further GHS 15 million was incurred
on materials as a result of faulty design work.

As a result of these problems, work on the building ceased for a fortnight during October 2017 and
it is estimated that approximately GHS 9 million of the labour costs relate to this period. The
building was completed on 1 July 2018 and occupied on 1 September 2018. You are required to
calculate the cost of the building that will be included in tangible non-current asset additions.

Q1
Flightline is an airline which treats its aircraft as complex non-current assets. The cost and other
details of one of its aircraft are:

$’000 estimated life

Exterior structure – purchase date 1 April 1995 120,000 20 years
Interior cabin fittings – replaced 1 April 2005 25,000 5 years

Engines (2 at $9 million each) – replaced 1 April 18,000 36,000 flying

2005 hours

No residual values are attributed to any of the component parts.

At 1 April 2008 the aircraft log showed it had flown 10,800 hours since 1 April 2005. In the

year ended 31 March 2009, the aircraft flew for 1,200 hours for the six months to 30 September

2008 and a further 1,000 hours in the six months to 31 March 2009.

On 1 October 2008 the aircraft suffered a ‘bird strike’ accident which damaged one of the

engines beyond repair. This was replaced by a new engine with a life of 36,000 hours at cost

of $10·8 million. The other engine was also damaged, but was repaired at a cost of $3 million;

however, its remaining estimated life was shortened to 15,000 hours. The accident also caused

cosmetic damage to the exterior of the aircraft which required repainting at a cost of $2 million.

As the aircraft was out of service for some weeks due to the accident, Flightline took the

opportunity to upgrade its cabin facilities at a cost of $4·5 million. This did not increase the

estimated remaining life of the cabin fittings, but the improved facilities enabled Flightline to

substantially increase the air fares on this aircraft

Required:
Calculate the charges to the income statement in respect of the aircraft for the year

ended 31 March 2009 and its carrying amount in the statement of financial position as

at that date.

Note: the post-accident changes are deemed effective from 1 October 2008.
Q2

Tibet acquired a new office building on 1 October 2014. Its initial carrying amount consisted of:

Land 2,000
Building structure 10,000
Air conditioning system 4,000 –––
––––
16,000 ––
–––––
The estimated lives of the building structure and air conditioning system are 25 years and 10 years
respectively. When the air conditioning system is due for replacement, it is estimated that the old
system will be dismantled and sold for $500,000. Depreciation is time apportioned where
appropriate.

At what amount will the office building be shown in Tibet’s statement of financial position
as at 31 March 2015?

Q3
The following trial balance extract relates to a property which is owned by Veeton as at 1 April
2014:
Dr Cr
$’000 $’000
Property at cost (20 year original life) 12,000
Accumulated depreciation as at 1 April 2014 3,600

On 1 October 2014, following a sustained increase in property prices, Veeton revalued its
property to $10·8 million.

What will be the depreciation charge in Veeton’s statement of profit or loss for the year
ended 31 March 2015?
 Question 4
The following costs were incurred in 2016 in the design and construction of a new office
building over a nine-month period during 2016:

GH¢000
Feasibility study 8
Architects' fees 100
Site clearance (by external demolition professionals) 80

Construction materials 600

Cost of own inventories used in the construction
(net realisable value if sold outside the company GH¢24,000) 30
Internal construction staff salaries during period of construction 360
External contractor costs 2,400
Income from renting out part of site as storage depot
during early phase of construction (12)
3,566

Required:
In accordance with IAS 16 Property, plant and equipment, calculate the amount that should be
capitalised as property in the financial statements for the year ending 31 December 2016.
 UNIVERSITY OF GHANA BUSINESS SCHOOL
DEPARTMENT OF ACCOUNTING
LEVEL 300
FINANCIAL REPORTING 1
TUTORIAL SET

IFRS 5 NONCURRENT ASSETS HELD FOR SALE AND DISCONTINUED

OPERATIONS

Q1
On 01/01/2001 Michelle Co bought a chicken processing machine for GHS 20,000. It has an
expected useful life of 10 years and a nil residual value. On 30/09/2003, Michelle Co decides to
sell the machine and starts actions to locate a buyer. The machine are in short supply, so Michelle
Co is confident that the machine will be sold fairly quickly. Its market value at 30/09/2003 is GHS
13,500 and it will cost GHS 500 to dismantle the machine and make it available to the purchaser.
The machine has not been sold at the year end.
Required
At what value should the machine be stated in Michelle Co’s statement of financial position at
31/12/2003.

Q2

a) Atta Kay Ltd has the following assets which it would like to classify under IFRS 5 Noncurrent
Assets Held for Sale and Discontinued Operations today:

Carrying Open market Estimated

Amount today value today selling
(GH¢million) (GH¢million) costs
(GH¢million)

Investment properties 62.3 30.9 0.5

(at fair value through profit or loss)
 Land used as company car park (held 49 50.5 1.0
under the revaluation model)
Trade Receivables 28 24 1.0
Plant (held under the cost model) 14 10 0.5

Required:
Calculate the carrying amount of assets that can be classified as held for sale
(assuming the relevant criteria are met where appropriate), after applying the
measurement rules of IFRS 5. (4 marks)

Question 3
Hyssop is preparing its financial statements for the year ended 31st December 2007
a) On 1st December, 2007, the entity became committed to a plan to sell a
surplus office property and has already found a potential buyer. On 15th
December 2007, a survey was carried out and it was discovered that the
building had dry rot and substantial remedial work to be carried out, but
the property will not be sold until the problem has been rectified. This is not
expected to occur until summer 2008. Required: Can the property be
classified as held for sale?
b) A subsidiary entity, B is for sale at a price of GHS 3,000,000. There has
been some interest from prospective buyers but no sale as of yet. One buyer
has made an offer of GHS 2,000,000 but the directors of Hyssop rejected
the offer. The directors have just received advise from their accountant that
the fair value of the business is GHS 2,500,000. They have decided not to
reduce the sale price of B at the moment. Required: can the subsidiary be
classified as held for sale?

Question 4
On 1st January 2001, AB acquires a building for GHS 200,000 with an expected life of 50 years.
On 31st December, 2004 AB puts the building up for immediate sale. Cost to sell the building is
estimated at GHS 10,000.
Required: outline the accounting treatment of the above if the building had a fair value at 31st
December, 2004 of:

a) GHS 220,000
b) GHS 110,000
Question 5
Nash purchased a building for its own use on 1st January, 2001 for GHS 1,000,000 and attributed
it a 50 year useful economic life. Nash uses the revaluation model to account for buildings.
On 31st December, 2002, this building was revalued to GHS 1,200,000. On 31st December 2003,
the building met the criteria to be classified as held for sale. Its fair value was deemed to be GHS
1,000,000 and the costs necessary to sell the building were estimated to be GHS 50,000.
Nash does not make reserve transfer in respect of excess depreciation.
Required: Discuss the accounting treatment of the above.
Question 6
Sofoline Ltd has a plant which cost GH¢40,000 and was purchased on 1 January 2013 with a
useful life of 10 years. The plant was being used as part of its business operating capacity. On 30
June 2015, Sofoline Ltd made a decision to classify the plant as held for sale and an agent was
appointed for the sale of the plant that have started advertising the plant at a selling price of
GH¢29,000 which was considered to be its fair value. The selling expenses are estimated to be
GH¢1,500. The asset has not yet been sold by the year end of 31 December 2015 and it has a fair
value less cost to sell of GH¢24,000 on this date.
Required:
Discuss how this will be accounted for in the financial statements of Sofoline Ltd for the year ended
31 December, 2015 in accordance with IFRS 5 Non-current Assets Held for Sale and
Discontinued Operations.

Q7
Halfway through the year an asset is identified as an asset held for sale after meeting the criteria
according to IFRS 5 Non-current Assets Held for Sale and Discontinued Operations. At the start
of the year the carrying amount of the asset was $150,000 (original cost $200,000 two years
ago). The asset is being depreciated on a straight-line basis.
What should the depreciation expense for the year be?

Q8
At the reporting date an asset is identified as an asset held for sale after meeting the criteria
according to IFRS 5 Non-current Assets Held for Sale and Discontinued Operations.
Where should the asset appear on the statement of financial position?

Q9
Kat has a year-end of 31 December.
On the 1st January 20X9, it classified one of its freehold properties as held for sale. At that date
the property had a carrying amount of $667,000 and had been accounted for according to the
revaluation model. Its fair value was estimated at $825,000 and the costs to sell at $3,000.
In accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations,
what amounts should be recognised in the financial statements for the year to 31 December
20X9?

Q10 State the conditions that must be met before an asset will be classified as held Non-current
asset held for sale
 UNIVERSITY OF GHANA BUSINESS SCHOOL
DEPARTMENT OF ACCOUNTING
LEVEL 300
FINANCIAL REPORTING 1
TUTORIAL SET
IAS 23 BORROWING COST
Question one
On 1 January 2005, Sainsco began to construct a supermarket which had an estimated useful life
of 40 years. It purchased a leasehold interest in the site for GHS25 million. The construction of
the building cost GHS9 million and the fixtures and fittings cost GHS6 million. The construction
of the supermarket was completed on 30 September 2005 and it was brought into use on 1
January 2006. Sainsco borrowed GHS40 million on 1 January 2005 in order to finance this
project. The loan carried interest at 10% pa. It was repaid on 30 June 2006.
Calculate the total amount to be included at cost in property, plant and equipment in respect of the
development at 31 December 2005.

Question two
A retailer, Lewis John constructed a new store at a cost of GHS50 million over six months from 1
January to 30 June 2009. To assist the financing of the project the company raised a GHS40
million 10% loan on 1 January. The loan was repaid on 30 September. The store did not open
until the following year. Calculate the initial cost valuation of the store.

Question four
e) IAS 23 Borrowing Costs requires that borrowing costs directly attributable to the
acquisition, construction or production of a 'qualifying asset' (one that
necessarily takes a substantial period of time to get ready for its intended use or
sale) are to be capitalised or included in the cost of the asset once they meet
certain conditions.

Required:
Identify THREE conditions that must be met before an entity can
commence to capitalise borrowing cost.
(3 marks)
QUESTION five

(a) Apex is a publicly listed supermarket chain. During the current year it started the building of
a new store. The directors are aware that in accordance with IAS 23 Borrowing costs certain
borrowing costs have to be capitalized.

Required:

Explain the circumstances when, and the amount at which, borrowing costs should be capitalised
in accordance with IAS 23.

(b) Details relating to construction of Apex’s new store:

Apex issued a $10 million unsecured loan with a coupon (nominal) interest rate of 6% on 1 April
2009. The loan is redeemable at a premium which means the loan has an effective finance cost of
7·5% per annum. The loan was specifically issued to finance the building of the new store which
meets the definition of a qualifying asset in IAS 23. Construction of the store commenced on 1 May
2009 and it was completed and ready for use on 28 February 2010, but did not open for trading
until 1 April 2010. During the year trading at Apex’s other stores was below expectations so Apex
suspended the construction of the new store for a two-month period during July and August 2009.
The proceeds of the loan were temporarily invested for the month of April 2009 and earned interest
of $40,000.

Required:

Calculate the net borrowing cost that should be capitalized as part of the cost of the new store and
the finance cost that should be reported in the income statement for the year ended 31 March 2010.

QUESTION seven

You are the Financial Accountant of Adom Ltd. The assistant accountant responsible for
preparing the 2012 annual financial statements is considering the accounting treatment of the
following non-current assets and has approached you for guidance.

Adom Ltd had the following loans in place at the beginning and end of 2012
 01/01 31/12

2012 2012

GHC GHC

12.5% Debenture stocks (repayable in 2015) 480,000 480,000

15% Bank loan [repayable in 2014] 320,000 320,000

On 1 January 2012 the company began the construction of a qualifying asset, a piece of machine
for hydroelectric plant at a cost of GHC400,000, using existing borrowings (the 12.5% debenture
and the 15% bank loan). Expenditure drawn down for the construction was GHC120, 000 on 1,
January 2012; GHC80, 000 on 1 May 2012 and GHC200, 000 on 1 October 2012. The machine
was completed and put to use on 31 December 2012.

Required:

Calculate the borrowing costs to be capitalized for the machine.

Assignment
QUESTION 8
(a) In line with IAS 23 – Borrowing Costs:
i. Explain the term borrowing costs, giving any three (3) examples of borrowing costs;
and 4 Marks ii. Explain the term qualifying assets, giving any three (3) examples
of qualifying assets. 4 Marks

(b) State any four (4) exclusions from qualifying assets under IAS 23. 4 Marks

(c) On January 1, 2015, Kack Ltd contracted with Hughes Ltd to construct a building for GH¢21.3
million on a plot of land Kack Ltd had acquired years earlier. Kack Ltd agreed to make five
payments in 2015, with the last payment for the first day of the last month of the year. The
building was completed as scheduled on December 31, 2015.
Kack Ltd made the following payments during the year:
GH¢
January 1, 2015 4,000,000
March 31, 2015 8,000,000
June 30, 2015 12,200,000
September 30, 2015 8,800,000
December 31, 2015 7,000,000

Kack Ltd had the following debt outstanding at December 31, 2015:
1. A 12%, 4-year loan note dated January 1, 2013 with interest compounded quarterly. Both
interest and principal due December 31, 2016 (relates specifically to building project)
GH¢16million.

2. A 10%, 10-year loan note dated December 31, 2010 with simple interest, payable annually
on December 31, GH¢20million.

3. A 12%, 5-year loan note dated December 31, 2012 with simple interest, payable annually
on December 31, GH¢16million.

You are required to:

Show by computations the following:
i. The total interest charges for the year ended December 31, 2015; 4 Marks ii. The
interest costs to be capitalized for the year ended December 31, 2015; and 6 Marks iii.
The interest costs to be expensed for the year ended December 31, 2015.

Question 9
On 01/01/2001 Hirise obtained planning permission to build a new office building. Construction
commenced on 01/03/2001. To help fund the cost of this building a loan for GHS 5,000,000 was
taken out from the bank on 01/04/2001. The interest rate on the loan was 10% per annum.
Construction of the building ceased during the month of July due to an unexpected shortage of
labour and materials.
By December 31 2001, the building was not complete. Costs incurred to date were GHS 12,000,000
(excluding interest on the loan).
Required:
Discuss the accounting treatment of the above in the financial statements of Hirise for the year
ended 31/12/2001.

Question 10
On 1st January 2009, Volta Engineering issued a bond to raise GHS 25,000,000 to fund a capital
project which will take three years to complete.
Amounts not yet needed for the project are invested on a temporary basis. During the year to 31 st
December 2009, Volta Engineering spent GHS 9,000,000 on the project.

The cost of servicing the bond was GHS 1,250,000 during this period and the company was able
to earn GHS 780,000 through the temporary reinvestment of the borrowed amount.
Required
Calculate current value of the project to be capitalized as at 31st December 2009.

Question 11

Savelugu construction has three sources of borrowing:

Details Average loan in the year Interest expense for the year
7 year loan 8,000,000 800,000
10 year loan 10,000,000 900,000
Bank overdraft 5,000,000 900,000

The 7-year loan has been specifically raised to fund the building of the qualifying asset. Savelugu
construction has incurred the following expenditure on a project funded from the general
borrowing for the year ended 31st December 2009.
Date incurred Amount

31st March 1,000,000

31st July 1,200,000

30th October 800,000

Required:
Determine the borrowing cost to be capitalized at the end of the year 31st December 2009.

Question 12
Grimtown took out a $10 million 6% loan on 1 January 2001 to build a new football stadium. Not
all of the funds were immediately required so $2 million was invested in 3% bonds until 30 June
2001. Construction of the stadium began on 1 February 2001 and was completed on 31 December
2001.
Calculate the amount of interest to be capitalised in respect of the football stadium as at 31
December 2001

Q13
IAS 23 “Borrowing Costs” regulates the extent to which entities are allowed to capitalize
borrowing costs incurred on money borrowed to finance the acquisition of certain assets.
Biakoye Ltd is a retail supermarket chain which constructs its own malls.
On 1 January, 2010, it started the construction of a supermarket. It acquired 50-year leasehold
interest in the site for GHS3 million. The construction of the building cost GHS9 million and
fixtures and fittings cost GHS6 million. Fixtures and fittings would have an estimated economic
useful life of ten years. The construction was completed on 30th September, 2010 and was put to
use immediately. The building is expected to have a useful life of 50 years. Biakoye Ltd borrowed
GHS18 million on 1st January, 2010 to finance the project. The loan carried an interest rate of
10% p.a and was repaid on 30th June, 2011.

Required
State the conditions to be met for:
(a) Capitalization of borrowing costs to commence. (3 marks) (b) Capitalization of
borrowing costs to cease. (3 marks) ii. Assuming that borrowing costs are capitalized where
appropriate, calculate (a) the carrying amount to be included in non-current assets in respect
of the Shopping mall at 31st December 2010. (3 marks)
(b) the total amount to be charged to the income statement in respect of the interest
expense and depreciation for the year to 31st December, 2010.
 UNIVERSITY OF GHANA BUSINESS SCHOOL
DEPARTMENT OF ACCOUNTING
FINANCIAL REPORTING
IAS 20 GOVERNMENT GRANT
TUTORIAL QUESTIONS
Question 1
On 01/06/2001 Clock received written confirmation from a local government agency that it
would receive a GHS 1,000,000 grant towards the purchase price of a new office building. The
grant becomes receivable on the date that Clock transfers the GHS 10,000,000 purchase price to
the vendor.
On 01/10/2001 Clock paid GHS10,000,000 in cash for its new office building, which is estimated
to have a useful life of 50 years. By 01/12/2001, the building was ready for use. Clock received
the government grant on 01/01/2002.
Required:
Discuss the possible accounting treatments of the above in the financial statements of clock for
the year ended 31/12/2001.

Q2
Bosco Aluworks Ltd, a manufacturer and supplier of aluminium utensils for
households, has recently established a new facility in Kumasi. To help in this new
operation, Bosco Aluworks Ltd have secured a number of grants from the
Government of Ghana and are unsure how the grants are to be accounted for in
the financial statements. The company has a year end of 30 April 2017 and all the
following transactions took place at 1 May 2016.

i) Bosco Aluworks Ltd has been awarded a grant for GH¢80,000, to be received
over three years, in respect of providing employment to fresh graduates in the
area. ii) Bosco Aluworks Ltd received a GH¢5,000 grant from the Ministry of
Business Development for the initial training of the new employees. iii) The
company also received a grant of GH¢120,000 from the Ministry of Special
Development Initiative towards the acquisition of a GH¢600,000 machine. The
machine has a useful economic life of 8 years and an estimated residual value of
GH¢60,000. Depreciation is on the straight line basis.

Required:
Explain how each of the above should be accounted for in the financial
statements of Bosco Aluworks Ltd for the year ended 31 April 2017, in
accordance with IAS 20 Accounting for
 Government Grants and Disclosure of Government Assistance. (5 marks)

Question 3
What is government grant?
Explain the conditions that must be met before recognizing a grant.

Q4
On 1 October 2016, the Government of Ghana awarded Sea Fishing Ltd one of six licences issued
to operate a production facility for five years. A subsidised sum of GH¢1m was paid by Sea Fishing
Ltd for the licence. The Government of Ghana considers the difference between the nominal value
and its fair value which is GH¢3,000,000 as a grant to Sea Fishing Ltd.
Required:
Explain the TWO ways that the Directors of Sea Fishing Ltd can account for this transaction.
(Apply the relevant accounting standards).

Q5
On January year 1 Entity O purchased a non current asset with a cost of GHS 500,000 and
received a grant of GHS 100,000 in relation to that asset.
The asset is being depreciated on a straight line basis over five years.
Show how the asset and the grant would be reflected in the financial statements at the end of the
first year under both methods of accounting for grant allowed by IAS 20.

Q6
A company received a government grant of GHS 400,000 towards the cost of an asset with a cost
of GHS 1,000,000.
The asset has an estimated useful life of 10 years and no residual value.
The company deducted the grant from the cost of the asset. / the company recognized the grant
as deferred income.
Three years after the asset was purchased the company discovered an irregularity in their original
application for the grant. As a result of this the company was required to repay the grant to the
government.
Required:
Explain, with suitable calculations, the financial reporting treatment of the above in the
financial statements in accordance with IAS 20: Accounting for Government Grants and
Disclosure of Government Assistance
 UNIVERSITY OF GHANA BUSINESS SCHOOL
DEPARTMENT OF ACCOUNTING
LEVEL 300
FINANCIAL REPORTING 1
TUTORIAL SET
IAS 40 INVESTMENT PROPERTY

Question 1
Celine, a manufacturing company, purchases a property for GHS1 million on 1 January 2001 for
its investment potential. The land element of the cost is believed to be GHS400,000, and the
buildings element is expected to have a useful life of 50 years. At 31 December 2001, local
property indices suggest that the fair value of the property has risen to GHS1.1 million. Show
how the property would be presented in the financial statements as at 31 December 2001 if
Celine adopts:
(a) the cost model
(b) the fair value model
Question 2
Lavender owns a property, which it rents out to some of its employees. The property was
purchased for $30million on 1 January 2002 and had a useful life of 30 years at that date. On 1
January 2007 it had a market value of $50 million and its remaining useful life remained
unchanged. Management wish to measure properties at fair value where this is allowed by
accounting standards.
Required:
How should the property be treated in the financial statements of Lavender for the year ended
31 December 2007.

Question 3

ABC owns a building that it used as its head office. On 01/01/2001, the building which was
measured under the cost model had a carrying amount of GHS 500,000. On this date when the fair
value of the building was GHS 600,000 ABC vacated the premises. However, the directors decided
to keep the building in order to rent it out to tenants and to potentially benefit from increases in
property prices. ABC measures investment properties at fair value. On 31 December 2001, the
property has a fair value of GHS 625,000.
Required:
Discuss the accounting treatment of the building in the financial statements of ABC for the year
ended 31/12/2001.
Question 4
Tanoso owns the following properties as at 31 December 2015:

Fair value
Property
(GH¢million)

Land with future use undetermined 3.2

Factory rented to Tanoso's subsidiary under an operating lease 2.4

10 floor office building (fair value is equal per floor) with 3 floors used as 15.0
the subsidiary's head office and seven floors rented to third parties under
an operating lease.

Empty building held for capital appreciation, but not leased out. 4.1

Tanoso's accounting policy is to hold its investment properties under the fair value model and its
land and buildings under the revaluation model.

Required:
In accordance with IAS 40 Investment Property calculate the carrying amount to be recognized
as investment property in Tanoso's consolidated financial statements as at 31 December 2015.

Question 5
You are the Financial Accountant of Adom Ltd. The assistant accountant responsible for preparing
the 2012 annual financial statements is considering the accounting treatment of the following non-
current assets and has approached you for guidance.

Adom Ltd acquired a property on 1 January 2007 at a cost of GHC400,000 and immediately
occupied it as office premise. On acquisition, it was estimated to have a useful life of 50 years.
Subsequent to its acquisition, the asset was measured at depreciated cost until 1 July 2012 when
management of Adom Ltd decided to convert the building into an investment property (mainly for
rentals). Following this decision, the property was fair valued at GHC373,800. Adom Ltd adopted
the fair value model for subsequent measurement of the investment property. At 31 December 2012,
it was fair valued at GHC380,000.

Required:

Account for the treatment of this property in the 2012 financial statements of Adom Ltd.

Question 6
Kyle Co purchased an investment property some year ago and carries it under the fair value model.
At 1 January 2001, the property had a fair value in Kyle Co's financial statements of $12 million.
On 1 July 2001 Kyle Co decided to move into the property and use it for its own business. At this
date the asset had a fair value of $14 million and a remaining useful life of 14 years.

What amount should be recorded in Kyle Co's statement of profit or loss for the year ended 31
December 2001?
 UNIVERSITY OF GHANA BUSINESS SCHOOL
DEPARTMENT OF ACCOUNTING
LEVEL 300
FINANCIAL REPORTING 1
TUTORIAL SET
IAS 37 PROVISIONS
Question 1
The following issues have arisen during the preparation of Skeptic’s draft financial statements for
the year ended 31 March 2014:

(i) From 1 April 2013, the directors have decided to reclassify research and amortised
development costs as administrative expenses rather than its previous classification as cost of
sales. They believe that the previous treatment unfairly distorted the company’s gross profit
margin.

(ii) Skeptic has two potential liabilitiies to assess. The first is an outstanding court case
concerning a customer claiming damages for losses due to faulty components supplied by Skeptic.
The second is the provision required for product warranty claims against 200,000 units of retail
goods supplied with a one-year warranty.

The estimated outcomes of the two liabilities are:

Court case Product warranty claims

10% chance of no damages awarded 70% of sales will have no claim

65% chance of damages of GHS4 million 20% of sales will require a GHS25 repair 25%

chance of damages of GHS6 million 10% of sales will require a GHS120 repair

Required:

Advise, and quantify where possible, how the above items (i) to (iii) should be treated in
Skeptic’s financial statements for the year ended 31 March 2014.

1
Question 2 (IAS 37 with Restructuring provision)
Manco has been experiencing substantial losses at its furniture making operation which is treated
as a separate operating segment. The company’s year-end is 30 September. At a meeting on 1 July
2010 the directors decided to close down the furniture making operation on 31 January 2011 and
then dispose of its non-current assets on a piecemeal basis. Affected employees and customers
were informed of the decision and a press announcement was made immediately after the meeting.
The directors have obtained the following information in relation to the closure of the operation:

(i) On 1 July 2010, the factory had a carrying amount of GHS3·6 million and is expected to
be sold for net proceeds of GHS5 million. On the same date the plant had a carrying amount of
GHS2·8 million, but it is anticipated that it will only realise net proceeds of GHS500,000.

(ii) Of the employees affected by the closure, the majority will be made redundant at cost of
GHS750,000, the remainder will be retrained at a cost of GHS200,000 and given work in one of
the company’s other operations.

(iii) Trading losses from 1 July to 30 September 2010 are expected to be GHS600,000 and from

this date to the closure on 31 January 2011 a further GHS1 millions of trading losses are expected.

Required:

Explain how the decision to close the furniture making operation should be treated in Manco’s
financial statements for the years ending 30 September 2010 and 2011. Your answer should
quantify the amounts involved.

Question 3 (IAS 37)

IAS 37 Provisions, contingent liabilities and contingent assets prescribes the accounting and
disclosure for those items named in its title.

Required:

Define provisions and contingent liabilities and briefly explain how IAS 37 improves consistency
in financial reporting.

2
Question 4 (IAS 16& 37)

On 1 January 2006, Bawa Doshie paid the Government of Ghana GHS5m for a three-year licence
to quarry gravel. At the end of the licence, Bawa Doshie must restore the quarry to its natural
state. This will cost a further GHS3m. These costs will be incurred on 1 January 2009. Bawa’s
Doshie cost of capital is 10%.

Explain how this expenditure is treated in the financial statement of Bawa Doshie.

Question 5 (IAS 16& 37)

1) On 1 July 2012, the JD Group acquired a newly constructed oil platform at a cost of
GHs60million together with the right to extract oil from an offshore oilfield under a
government licence. The terms of the licence are the JD Group will have to remove the
platform (which will then have no value) and restore the sea bed to an environmentally
satisfactory condition in 10 years’ time when the oil reserves have been exhausted. The
estimated cost of this on 30th June 2022 will be GHs30million. The present value of GHs1
receivable in 10 years at the appropriate discount rate for JD Group of 8% is GHs0.46.
Required:

Explain and quantify how the oil platform should be treated in the financial statements of the JD
Group for the year ended 30th June 2013.

Question 6 Possible Contingent Liabilities (IAS 37)

One of the company’s employees was injured during the year. He had been operating a piece of
machinery which had been known to have a faulty guard. The company’s lawyers have
advised that the employees has a very strong case, but will be unable to estimate the likely
financial damages until further medical evidence becomes available. One of the company’s
customers is claiming compensation for the losses sustained as a result of a delayed delivery. The
customer had ordered a batch of cut sheet with the intention of producing leaflets to promote
a special offer. There was a delay in supplying the paper and the leaflets could not be prepared
in time. The company’s lawyers have advised that there was no specific agreement to

3
supply the goods in time for this promotion and furthermore, that it would be almost impossible
to attribute the failure of the special offer to the delay in the supply of the paper.

Required:

Explain how each of these matters should be dealt with in the published accounts for the year
ended 31st March, 2013 in the light of the International Financial Reporting Standards referred
to above. You should assume that the amounts involved are material in each case. (10 marks)

Question 7

Guarantee
An entity sells domestic appliances such as washing machines. These goods retail at GHS500
each and are sold with a one-year guarantee. Under the terms of the guarantee if the machine
needs to be repaired then the entity will do so at no charge to the customer. In the entity’s
experience 20% of machines sold do require some form of repair at an average cost of GHS50.
The entity has sold 200 machine. You may assume that the repairs are performed one year after
the sale and that the relevant discount rate is 10%.

Required:

Calculate any provision required that arises under the guarantee.

A provision is required. The relevant past event creating the present obligation to repair the
machines is the sale. The liability can be measured with reliability, using expected values and
discounting as follows.

GHS50 repair cost x 200 machines x 20% expected value x 0.909 discount factor = GHS1,818

– Oil rig
An oil company has erected an oil rig in the North Sea. The installation costs are GHS50million
and the cost of construction GHS400 million. It is also estimated that it will cost GHS200 million
to dismantle in twenty years’ time.

Required:

4
When (if ever) should a provision be made for the decommissioning costs and how should this
be accounted for?

A provision is only required if either there is a legal obligation (e.g. the licences granting
permission to drill contains a requirement to dismantle the rig) or a constructive obligation (e.g.
the company has published suitable and detailed environmental policies). The decommissioning
costs should be provided for in full and measured at present value to reflect the time value of
money. The provision is capitalised as an asset and then subject to amortisation.

Question 8 (IAS 16,17,37 Combined )

Fundo entered into a 20-year operating lease for a property on 1 October 2000 which has
a remaining life of eight years at 1 October 2012. The rental payments are GHS2·3 million per
annum.

Prior to 1 October 2012, Fundo obtained permission from the owner of the property to make some
internal alterations to the property so that it can be used for a new manufacturing process which
Fundo is undertaking. The cost of these alterations was GHS7 million and they were completed on
1 October 2012 (the time taken to complete the alterations can be taken as being negligible). A
condition of being granted permission was that Fundo would have to restore the property to its
original condition before handing back the property at the end of the lease. The estimated
restoration cost on 1 October 2012, discounted at 8% per annum to its present value, is GHS5
million.

Required:

(a) Explain how the lease, the alterations to the leased property and the restoration costs
should be treated in the financial statements of Fundo for the year ended 30 September 2013. (4
marks)

(b) Prepare extracts from the financial statements of Fundo for the year ended 30 September
2013 reflecting your answer to (a) above. (6 marks)

5
Question 9 (IAS 37 and 16 combined)

On 1 October 2010, Borough commenced the extraction of crude oil from a new well on the seabed.
The cost of a 10-year licence to extract the oil was GHS50 million. At the end of the extraction,
although not legally bound to do so, Borough intends to make good the damage the extraction has
caused to the seabed environment. This intention has been communicated to parties external to
Borough. The cost of this will be in two parts: a fixed amount of GHS20 million and a variable
amount of 2 cents per barrel extracted. Both of these amounts are based on their present values
as at 1 October 2010 (discounted at 8%) of the estimated costs in 10 years’ time. In the year to 30
September 2011 Borough extracted 150 million barrels of oil.

Describe, and quantify where possible, how the above should be treated in Borough’s statement of
financial position for the year ended 30 September 2011.

Question 10(IAS 37 and 16 combined)

On 1 October 2007, Promoil acquired a newly constructed oil platform at a cost of GHS30 million
together with the right to extract oil from an offshore oilfield under a government licence. The
terms of the licence are that Promoil will have to remove the platform (which will then have no
value) and restore the sea bed to an environmentally satisfactory condition in 10 years’ time when
the oil reserves have been exhausted. The estimated cost of this on 30 September 2017 will be
GHS15 million. The present value of GHS1 receivable in 10 years at the appropriate discount rate
for Promoil of 8% is GHS0·46.

Required:

(i) Explain and quantify how the oil platform should be treated in the financial statements of
Promoil for the year ended 30 September 2008;

(ii) Describe how your answer to (b)(i) would change if the government licence did not require an
environmental clean-up.

Q11

6
An entity sells goods with a warranty covering customers for the cost of repairs of any defects that
are discovered within the first two months after purchase. Past experience suggests that 88% of
the goods sold will have no defects, 7% will have minor defects and 5% will have major defects. If
minor defects were detected in all products sold, the cost of repairs would be $24,000. If major
defects were detected in all products sold, the cost would be $200,000.
What amount of provision should be made?

Q12

An entity has to rectify a serious fault in an item of plant that it has constructed for a customer.
The individual most likely outcome is that the repair will succeed at the first attempt at a cost of
$400,000, but there is a chance that a further attempt will be necessary, increasing the total cost
to $500,000.
What amount of provision should be recognised?

Q13

Rowsley is a company that carries out many different activities. It is proud of its reputation as a
‘caring’ organisation and has adopted various ethical policies towards its employees and the
wider community in which it operates. As part of its annual financial statements, the company
publishes details of its environmental policies, which include setting performance targets for
activities such as recycling, controlling emissions of noxious substances and limiting use of non-
renewable resources. The company has an overseas operation that is involved in mining
precious metals. These activities cause significant damage to the environment, including
deforestation. The company incurred capital costs of $100 million in respect of the mine and it is
expected that the mine will be abandoned in eight years' time. The mine is situated in a country
where there is no environmental legislation obliging companies to rectify environmental
damage, and it is very unlikely that any such legislation will be enacted within the next eight
years. It has been estimated that the cost of cleaning the site and re-planting the trees will be $25
million if the replanting were successful at the first attempt, but it will probably be necessary to
make a further attempt, which will increase the cost by a further $5 million.

7
The company's cost of capital is 10%.

Discuss whether a provision for the cost of cleaning the site should be made and
prepare extracts of the financial statements.

Q14

A common example of contingencies arises in connection with legal action. If A

sues B because it believes that it has incurred losses as a result of B’s faulty
products, then B may be liable for damages. Whether or not the damages will
actually be paid depends on the outcome of the case. Solution

Solution
Until the outcome of the case is known, B has a contingent liability and A has a
contingent asset.

Q15
Illustration 6 – Contingent liability
During the year to 31 March 20X9, a customer commenced legal proceedings against a
company, claiming that one of the food products that it manufactures had caused several
members of his family to become seriously ill. The company’s lawyers have advised that this
action will probably not succeed.
Should the company disclose this in its financial statements?