Question Tag: Capitalization

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  • 20 Marks

FR – Nov 2014 – L2 – Q5 – Property, Plant, and Equipment (IAS 16)

Discuss the conditions for capitalizing borrowing costs and calculate the total interest to be capitalized for VITAMAX Plc.

In accordance with IAS 23, Borrowing Costs that are directly attributable to the acquisition, construction, or production of a qualifying asset form part of the cost of that asset, while other borrowing costs are recognized as an expense.

Required:

a. State the conditions wherein capitalisation of borrowing costs:

i. Commences

ii. Should not be suspended

iii. Should cease (6 Marks)

b. VITAMAX Plc. is constructing a factory that will take about 18 months to complete. The company commenced construction on 2 January 2013. The following payments were made during the year:

Date Amount (N’000)
31 January 40,000
31 March 90,000
30 June 20,000
31 October 40,000
30 November 50,000

The first payment on 31 January was funded from the company’s pool of debts. However, the company succeeded in raising Medium-Term Loan Notes for an amount of N160,000,000 on 31 March 2013 at a simple interest rate of 9 percent per year, calculated and payable monthly in arrears. These funds were specifically used for the construction. Excess funds were temporarily invested at 6 percent monthly in arrears and payable in cash. The pool of debts were again used for a N40,000,000 payment on 30 November 2013 which could not be funded from the Medium-Term Loan Notes.

The construction project was temporarily halted for three weeks in May 2013 when substantial technical and administrative work was carried out.

The following amounts of debts were outstanding at the reporting date of 31 December 2013:

Description Amount (N’000)
Medium-Term Loan Notes 160,000
Bank Overdraft 240,000
10% 7-Year Notes 1,800,000

For the bank overdraft, the weighted average amount outstanding during the year was N150,000,000 and the total interest charged by the bank amounted to N6,760,000 for the year.

Required:

Calculate the total amount of interest to be capitalized. (9 Marks)

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  • 30 Marks

PSAF – Nov 2015 – L2 – Q1 – International Public Sector Accounting Standards (IPSAS)

Evaluate financial treatment for leased machinery, borrowing costs, and investment properties in a public sector agency's financial statements.

Top-Hill State Investment Agency, a government business entity, provided the following transactions for the financial year ended December 31, 2014:

a. On January 1, 2014, the company acquired machinery on lease with a fair value of ₦500,000 and a residual value of NIL at the end of its economic life of five years. The lease payment of ₦139,778 was made first on January 1, 2014, with payments due on the first day of each financial year. The implicit interest rate was set at 8%.

b. Top-Hill State Investment Agency incurred borrowing costs of ₦5 million for the financial year ended December 31, 2014, with ₦1.2 million specifically related to constructing a qualifying asset. The Agency’s policy is to capitalize borrowing costs in line with IPSAS 5 on “Borrowing Costs.”

c. The Agency applies the cost model to its investment properties. At the end of the 2013 financial year, the investment properties carried a value of ₦4.5 million. The Agency depreciates these properties using a 25% reducing balance. The fair value as of December 31, 2014, was ₦4.2 million.

Required:

  1. Explain how the newly leased machinery should be treated in the Financial Statements (Extracts) of the Agency.
  2. State the amount to be taken to the Statement of Financial Performance (Extracts) and the Statement of Financial Position (Extracts) for the year ended December 31, 2014. (20 Marks)
  3. Explain how the ₦5 million borrowing costs should be treated in the financial statements (Extracts) and state the amount to be recorded in the Statement of Financial Performance (Extracts) and the Statement of Financial Position (Extracts) for the year ended December 31, 2014. (4 Marks)
  4. Identify and explain the accounting entries required as of December 31, 2014, to account for the Investment Properties. Show workings. (6 Marks)

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  • 5 Marks

CR – May 2020 – L3 – Q2b – Capitalization of Borrowing Costs

Dompoase Ltd incurred the following borrowing costs during the financial year 2018:

GH¢’000
Overdraft interest 12
Foreign currency loan interest (correctly translated into GH¢) 84
Foreign currency loan exchange differences on capital 140

In addition, a three-year fixed-rate GH¢2 million loan was taken out on 1 January 2018 at 6.5%. A loan set-up fee was charged at GH¢20,000. This increased the effective interest rate on the loan to 6.88%.

Required:
Determine the maximum amount that could potentially be capitalized as borrowing costs during the period (assuming an asset was being financed using all available finance).

 

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  • 7 Marks

FR – May 2019 – L2 – Q7b – Impairment of Assets (IAS 36)

Preparation of financial statements extracts for intangible assets and associated costs for Soft Solutions Limited.

b. During the year ended 31 December, 2018 Soft Solutions Limited carried out
the following transactions:

  • N720m was spent on developing a new “Microfinance Software” which
    received the approval of software regulatory authority in Nigeria on 1 July,
    2018 and is proving commercially successful.
    The financial controller expects the project to be in profit within 12 months
    of the approval date. The patent was registered with Federal Ministry of
    Trade and Investment on 1 July, 2018; it costs N180m and remains in force
    for three years.
  • On 1 September, 2018 Soft Solutions Limited acquired an up to date list of
    Global Positioning System (GPS) at a cost of N60m and the company has
    been visiting the tracked customers to explain the operations of the new
    microfinance software in rural and urban areas. This is expected to generate
    sales throughout the life-cycle of the microfinance software.
  • A research project was set up on 1 October, 2018 which is expected to result
    in a new banking software called “Recent Bankers”. N24m was spent on
    computer equipment and N48m on staff salaries. The equipment has an
    expected life of four years

Required:

Using the above information:
i. Prepare the extract of statement of financial position of Soft Solutions
Limited as at 31 December, 2018. (5 Marks)
ii. Prepare the summary of the cost to be charged to statement of profit or
loss for the year ended 31 December, 2018. (2 Marks)

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  • 8 Marks

FR – May 2019 – L2 – Q7a – Property, Plant, and Equipment (IAS 16)

Discussion of the recognition criteria for internally developed intangible assets under IAS 38 and how to account for them.

Soft Solutions Limited is a Nigerian company that specializes in the development of software applications. The company has been in operation for over 16 years and has invested considerable amounts of money internally in developing accounting and banking software. The treatment of these assets is prescribed by IAS 38 – Intangible Assets.

Required:
a. As a partly qualified accountant working in the accounts department of Soft Solutions Limited, the financial controller of the company asked you for a memo which addresses the following:
i. Whether internally developed intangible assets should be recognized and, if so, how should they be recorded initially and subsequently accounted for. (5 Marks)
ii. The criteria for revaluation of intangible assets? (3 Marks)

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  • 7 Marks

FR – May 2019 – L2 – Q6b – Accounting for Government Grants (IAS 20)

Calculation of the amount to be capitalized for qualifying capital work-in-progress under IAS 23.

Jacko Company Limited has three major sources of borrowings stated below as at 1 January 2018.

Types Average Loan in the Year (N’000) Interest Expense Incurred in the Year (N’000) Income Earned from Temporary Investment of the Amount Borrowed (N’000)
7 years loan notes 128,000 20,000 12,480
10 years loan notes 160,000 14,400 —
Bank overdraft 80,000 14,400 —

The 7 years loan notes have been specifically raised to fund the building of a qualifying asset.

During the year to 31 December 2018, Jacko Company Limited spent N144 million on the building and the fair value of the building is N147 million as at 31 December 2018.

The company also incurred the following expenditure on a qualifying project funded from the other borrowings for the year ended 31 December 2018.

Date Incurred Amount (N’000)
31 March 2018 16,000
31 July 2018 19,200
31 October 2018 12,600

Required:
Calculate the amount to be capitalized in respect of the qualifying capital work-in-progress for the year ended 31 December 2018.

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  • 8 Marks

FR – May 2019 – L2 – Q6a – Accounting for Government Grants (IAS 20)

Discussion of the conditions for capitalizing borrowing costs under IAS 23 and guidelines on commencement, suspension, and cessation of capitalization.

A company might incur significant interest cost if it has to raise a loan to finance the purchase or construction of an asset. IAS 23 on borrowing costs defines borrowing costs and sets out guidance on the circumstances under which such interest is to be capitalized as part of the cost of qualifying assets.

Required:
Discuss the conditions that must be met in order to capitalize borrowing costs under IAS 23, setting out when capitalization of the borrowing costs should commence, be suspended, or cease.

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  • 7 Marks

FR – May 2019 – L2 – Q4a – Property, Plant, and Equipment (IAS 16)

Explanation of how initial costs of PPE should be measured and when subsequent expenditure should be capitalized under IAS 16.

The objectives of IAS 16 are to prescribe the accounting treatment of property, plant, and equipment (PPE).

Required:
Explain how initial costs of property, plant, and equipment (PPE) should be measured and state the circumstances in which subsequent expenditure on non-current assets should be capitalized.

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  • 1 Marks

FA – Nov 2014 – L1 – SA – Q13 – Accounting for Property, Plant, and Equipment (IAS 16)

Calculating the amount to be capitalized as cost of property, plant, and equipment.

Given the following information:

  • Cost of property, plant and equipment: N5,000,000
  • Administrative and general overhead: N750,000
  • Installation cost of property, plant & equipment: N500,000
  • Cost of entertainment: N150,000

What amount should be capitalized as cost of property, plant, and equipment?

A. N5,500,000
B. N6,250,000
C. N6,400,000
D. N6,700,000
E. N6,900,000

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  • 1 Marks

FA – May 2021 – L1 – SA – Q8 – Accounting for Property, Plant, and Equipment (IAS 16)

Calculate the initial cost of equipment including additional expenses.

An entity purchased equipment for ₦20,000. The equipment was transported at ₦86, installation cost was ₦125, abnormal waste of materials was ₦15,000, and training cost of staff on the use of the machine was ₦255. How much should be recorded as the initial cost of the equipment?
A. ₦20,000
B. ₦20,086
C. ₦20,125
D. ₦20,211
E. ₦20,466

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  • 20 Marks

FR – Nov 2014 – L2 – Q5 – Property, Plant, and Equipment (IAS 16)

Discuss the conditions for capitalizing borrowing costs and calculate the total interest to be capitalized for VITAMAX Plc.

In accordance with IAS 23, Borrowing Costs that are directly attributable to the acquisition, construction, or production of a qualifying asset form part of the cost of that asset, while other borrowing costs are recognized as an expense.

Required:

a. State the conditions wherein capitalisation of borrowing costs:

i. Commences

ii. Should not be suspended

iii. Should cease (6 Marks)

b. VITAMAX Plc. is constructing a factory that will take about 18 months to complete. The company commenced construction on 2 January 2013. The following payments were made during the year:

Date Amount (N’000)
31 January 40,000
31 March 90,000
30 June 20,000
31 October 40,000
30 November 50,000

The first payment on 31 January was funded from the company’s pool of debts. However, the company succeeded in raising Medium-Term Loan Notes for an amount of N160,000,000 on 31 March 2013 at a simple interest rate of 9 percent per year, calculated and payable monthly in arrears. These funds were specifically used for the construction. Excess funds were temporarily invested at 6 percent monthly in arrears and payable in cash. The pool of debts were again used for a N40,000,000 payment on 30 November 2013 which could not be funded from the Medium-Term Loan Notes.

The construction project was temporarily halted for three weeks in May 2013 when substantial technical and administrative work was carried out.

The following amounts of debts were outstanding at the reporting date of 31 December 2013:

Description Amount (N’000)
Medium-Term Loan Notes 160,000
Bank Overdraft 240,000
10% 7-Year Notes 1,800,000

For the bank overdraft, the weighted average amount outstanding during the year was N150,000,000 and the total interest charged by the bank amounted to N6,760,000 for the year.

Required:

Calculate the total amount of interest to be capitalized. (9 Marks)

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  • 30 Marks

PSAF – Nov 2015 – L2 – Q1 – International Public Sector Accounting Standards (IPSAS)

Evaluate financial treatment for leased machinery, borrowing costs, and investment properties in a public sector agency's financial statements.

Top-Hill State Investment Agency, a government business entity, provided the following transactions for the financial year ended December 31, 2014:

a. On January 1, 2014, the company acquired machinery on lease with a fair value of ₦500,000 and a residual value of NIL at the end of its economic life of five years. The lease payment of ₦139,778 was made first on January 1, 2014, with payments due on the first day of each financial year. The implicit interest rate was set at 8%.

b. Top-Hill State Investment Agency incurred borrowing costs of ₦5 million for the financial year ended December 31, 2014, with ₦1.2 million specifically related to constructing a qualifying asset. The Agency’s policy is to capitalize borrowing costs in line with IPSAS 5 on “Borrowing Costs.”

c. The Agency applies the cost model to its investment properties. At the end of the 2013 financial year, the investment properties carried a value of ₦4.5 million. The Agency depreciates these properties using a 25% reducing balance. The fair value as of December 31, 2014, was ₦4.2 million.

Required:

  1. Explain how the newly leased machinery should be treated in the Financial Statements (Extracts) of the Agency.
  2. State the amount to be taken to the Statement of Financial Performance (Extracts) and the Statement of Financial Position (Extracts) for the year ended December 31, 2014. (20 Marks)
  3. Explain how the ₦5 million borrowing costs should be treated in the financial statements (Extracts) and state the amount to be recorded in the Statement of Financial Performance (Extracts) and the Statement of Financial Position (Extracts) for the year ended December 31, 2014. (4 Marks)
  4. Identify and explain the accounting entries required as of December 31, 2014, to account for the Investment Properties. Show workings. (6 Marks)

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  • 5 Marks

CR – May 2020 – L3 – Q2b – Capitalization of Borrowing Costs

Dompoase Ltd incurred the following borrowing costs during the financial year 2018:

GH¢’000
Overdraft interest 12
Foreign currency loan interest (correctly translated into GH¢) 84
Foreign currency loan exchange differences on capital 140

In addition, a three-year fixed-rate GH¢2 million loan was taken out on 1 January 2018 at 6.5%. A loan set-up fee was charged at GH¢20,000. This increased the effective interest rate on the loan to 6.88%.

Required:
Determine the maximum amount that could potentially be capitalized as borrowing costs during the period (assuming an asset was being financed using all available finance).

 

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  • 7 Marks

FR – May 2019 – L2 – Q7b – Impairment of Assets (IAS 36)

Preparation of financial statements extracts for intangible assets and associated costs for Soft Solutions Limited.

b. During the year ended 31 December, 2018 Soft Solutions Limited carried out
the following transactions:

  • N720m was spent on developing a new “Microfinance Software” which
    received the approval of software regulatory authority in Nigeria on 1 July,
    2018 and is proving commercially successful.
    The financial controller expects the project to be in profit within 12 months
    of the approval date. The patent was registered with Federal Ministry of
    Trade and Investment on 1 July, 2018; it costs N180m and remains in force
    for three years.
  • On 1 September, 2018 Soft Solutions Limited acquired an up to date list of
    Global Positioning System (GPS) at a cost of N60m and the company has
    been visiting the tracked customers to explain the operations of the new
    microfinance software in rural and urban areas. This is expected to generate
    sales throughout the life-cycle of the microfinance software.
  • A research project was set up on 1 October, 2018 which is expected to result
    in a new banking software called “Recent Bankers”. N24m was spent on
    computer equipment and N48m on staff salaries. The equipment has an
    expected life of four years

Required:

Using the above information:
i. Prepare the extract of statement of financial position of Soft Solutions
Limited as at 31 December, 2018. (5 Marks)
ii. Prepare the summary of the cost to be charged to statement of profit or
loss for the year ended 31 December, 2018. (2 Marks)

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  • 8 Marks

FR – May 2019 – L2 – Q7a – Property, Plant, and Equipment (IAS 16)

Discussion of the recognition criteria for internally developed intangible assets under IAS 38 and how to account for them.

Soft Solutions Limited is a Nigerian company that specializes in the development of software applications. The company has been in operation for over 16 years and has invested considerable amounts of money internally in developing accounting and banking software. The treatment of these assets is prescribed by IAS 38 – Intangible Assets.

Required:
a. As a partly qualified accountant working in the accounts department of Soft Solutions Limited, the financial controller of the company asked you for a memo which addresses the following:
i. Whether internally developed intangible assets should be recognized and, if so, how should they be recorded initially and subsequently accounted for. (5 Marks)
ii. The criteria for revaluation of intangible assets? (3 Marks)

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  • 7 Marks

FR – May 2019 – L2 – Q6b – Accounting for Government Grants (IAS 20)

Calculation of the amount to be capitalized for qualifying capital work-in-progress under IAS 23.

Jacko Company Limited has three major sources of borrowings stated below as at 1 January 2018.

Types Average Loan in the Year (N’000) Interest Expense Incurred in the Year (N’000) Income Earned from Temporary Investment of the Amount Borrowed (N’000)
7 years loan notes 128,000 20,000 12,480
10 years loan notes 160,000 14,400 —
Bank overdraft 80,000 14,400 —

The 7 years loan notes have been specifically raised to fund the building of a qualifying asset.

During the year to 31 December 2018, Jacko Company Limited spent N144 million on the building and the fair value of the building is N147 million as at 31 December 2018.

The company also incurred the following expenditure on a qualifying project funded from the other borrowings for the year ended 31 December 2018.

Date Incurred Amount (N’000)
31 March 2018 16,000
31 July 2018 19,200
31 October 2018 12,600

Required:
Calculate the amount to be capitalized in respect of the qualifying capital work-in-progress for the year ended 31 December 2018.

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  • 8 Marks

FR – May 2019 – L2 – Q6a – Accounting for Government Grants (IAS 20)

Discussion of the conditions for capitalizing borrowing costs under IAS 23 and guidelines on commencement, suspension, and cessation of capitalization.

A company might incur significant interest cost if it has to raise a loan to finance the purchase or construction of an asset. IAS 23 on borrowing costs defines borrowing costs and sets out guidance on the circumstances under which such interest is to be capitalized as part of the cost of qualifying assets.

Required:
Discuss the conditions that must be met in order to capitalize borrowing costs under IAS 23, setting out when capitalization of the borrowing costs should commence, be suspended, or cease.

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  • 7 Marks

FR – May 2019 – L2 – Q4a – Property, Plant, and Equipment (IAS 16)

Explanation of how initial costs of PPE should be measured and when subsequent expenditure should be capitalized under IAS 16.

The objectives of IAS 16 are to prescribe the accounting treatment of property, plant, and equipment (PPE).

Required:
Explain how initial costs of property, plant, and equipment (PPE) should be measured and state the circumstances in which subsequent expenditure on non-current assets should be capitalized.

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  • 1 Marks

FA – Nov 2014 – L1 – SA – Q13 – Accounting for Property, Plant, and Equipment (IAS 16)

Calculating the amount to be capitalized as cost of property, plant, and equipment.

Given the following information:

  • Cost of property, plant and equipment: N5,000,000
  • Administrative and general overhead: N750,000
  • Installation cost of property, plant & equipment: N500,000
  • Cost of entertainment: N150,000

What amount should be capitalized as cost of property, plant, and equipment?

A. N5,500,000
B. N6,250,000
C. N6,400,000
D. N6,700,000
E. N6,900,000

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  • 1 Marks

FA – May 2021 – L1 – SA – Q8 – Accounting for Property, Plant, and Equipment (IAS 16)

Calculate the initial cost of equipment including additional expenses.

An entity purchased equipment for ₦20,000. The equipment was transported at ₦86, installation cost was ₦125, abnormal waste of materials was ₦15,000, and training cost of staff on the use of the machine was ₦255. How much should be recorded as the initial cost of the equipment?
A. ₦20,000
B. ₦20,086
C. ₦20,125
D. ₦20,211
E. ₦20,466

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