Topic: Property, Plant, and Equipment (IAS 16)

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CR – May 2021 – L3 – Q1c – Property, Plant and Equipment (IAS 16)

Record journal entries for PPE acquisition and related foreign exchange adjustments in the books of Ngono Plc.

Question

c. Ngono Plc. has a financial year end of September 30. The Company buys property, plant and equipment for its office in Nigeria from foreign supplier Omaha Inc. in USA. On June 30, 2020, Ngono Plc. took delivery of PPE from Omaha Inc. with invoice value amounting to $100,000 and is due for settlement in equal instalments on August 30, 2020 and November 30, 2020. Clearing cost and import duty paid on the acquisition of the PPE amounted to N1,250,000. It is the policy of Ngono Plc to depreciate PPE at 20% on cost using the straight –line method. The depreciation is provided in full in the year of acquisition and none in the year of disposal.
Both Ngono Plc. and Omaha Inc. honoured their own part of the agreement in the transaction.
Movement recorded in the exchange rate were as follows:

Required:
Show the journal accounting entries to record the above transaction in the books of Ngono Plc. (10 Marks)

Answer

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Tags: Depreciation, Foreign Exchange, Journal Entries, PPE
Level: Level 3

Topic: Property, Plant, and Equipment (IAS 16)

FR – Nov 2023 – L2 – Q3b – Property, Plant, and Equipment (IAS 16)

Discuss financial implications of reclassifying investment property under cost and fair value models.

Question

Young Shall Grow Limited with year-end December 31 purchased an office building, with a useful life of 50 years, for N55 million on January 1, 2013. The amount attributable to land was negligible. The company used the building as its head office until December 31, 2017, when the entity moved to a larger premises.

The building was reclassified as an investment property and leased out under a five-year lease. However, owing to a change in circumstances, Young Shall Grow Limited took possession of the building five years later, on December 31, 2022, to use it as its head office once more. At that date, the remaining useful life of the building was confirmed as 40 years.

The fair value of the building was as follows:

At December 31, 2017: N60 million
At December 31, 2022: N75 million

Required:

Discuss how the changes of use should be reflected in the financial statements of Young Shall Grow Limited:

If the company uses the cost model for its investment properties.
If the company uses the fair value model for its investment properties.

Answer

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Tags: Change in Use, IAS 40, Investment Property, Reclassification
Level: Level 2

Topic: Property, Plant, and Equipment (IAS 16)

FR – Nov 2023 – L2 – Q3a – Property, Plant, and Equipment (IAS 16)

Explain reclassification criteria for transferring investment property to PPE.

Question

a. If a property is transferred into or out of the category of property, plant and equipment (PPE), it might be reclassified as investment property or as no longer an investment property.

A transfer of investment property can only be made where there is a change of use of such property.

Answer

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Tags: Equipment, IAS Compliance, Investment Property, Plant, Property, Reclassification
Level: Level 2

Topic: Property, Plant, and Equipment (IAS 16)

FR – May 2016 – L2 – Q5b – Accounting Policies, Changes in Accounting Estimates, and Errors (IAS 8)

Assess the validity of the assistant accountant's suggestion on extending plant life for depreciation and illustrate its impact on the financial statements.

Question

The directors of Oluwaseun Plc are disappointed by the draft profit for the year ended September 30, 2015. One of your staff, who is an assistant accountant, has suggested one area where he believes the reported profit may be improved, if it is acceptable to the company’s management.

Included in the financial statement of Oluwaseun Plc is an item of plant which had cost N80 million to purchase and install three years ago on October 1, 2012. It is the policy of Oluwaseun Plc to depreciate this plant on a straight-line basis over a five-year period, assuming nil residual value.

The depreciation of the plant has progressed as envisaged, but at the start of the current year (October 1, 2014), the production manager estimated that the plant was likely to last eight years in total from the date of its purchase as against the original five-year period upon which current depreciation is based.

The assistant accountant has calculated that, based on an eight-year life (with no residual value), the accumulated depreciation of the plant at September 30, 2015, would be N30 million (N80 million/8 years × 3). In the financial statements for the year ended September 30, 2014, the accumulated depreciation was N32 million (N80 million/5 years × 2). Therefore, by adopting an eight-year life, Oluwaseun can avoid making a depreciation charge in the current year and instead credit N2 million (N32 million – N30 million) from the accumulated depreciation account to the income statement in the current year to improve the reported profit.

Required:

i. Comment on the acceptability of the assistant accountant’s suggestions. (6 Marks)
ii. Illustrate how the suggestions will affect the financial statements of Oluwaseun Plc based on the correct application of the relevant IFRS. (9 Marks)

Answer

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Level: Level 2

FR – May 2015 – L2 – SB – Q2 – Property Plant and Equipment

Determine disclosure requirements for separate financial statements and calculate equity, non-controlling interests, goodwill, and property valuation adjustments.

Question

(a) When a parent company elects not to prepare consolidated financial statements and instead prepares separate financial statements, what are the disclosure requirements stipulated in IAS 27 on Separate Financial Statements? (6 Marks)

(b) Kerewanta Plc acquired 60% of the equity shares of Orijinmi Plc through a share exchange (three shares in Kerewanta Plc for four shares in Orijinmi Plc). The share value of Kerewanta Plc at the acquisition date (April 1, 2013) was N10 per share. Additionally, Kerewanta Plc would make a deferred cash payment of 70k per acquired share on April 1, 2014. Kerewanta Plc’s cost of capital is 12% per annum, with the following information extracted as of March 31, 2014:

Additional Information:

An equipment in Orijinmi Plc had a fair value of N360,000,000 above its carrying amount with a four-year remaining life. The group uses straight-line depreciation.
Orijinmi Plc had an unrecorded deferred tax liability of N10,000,000 as of March 31, 2014, with no goodwill impairment.
Non-controlling interests are valued at fair value at acquisition. Fair value of Orijinmi Plc’s non-controlling interests at acquisition was N6 per share.

Required: Calculate the following as at March 31, 2014:

Equity
Non-controlling Interests
Consolidated Goodwill
Property, Plant, and Equipment (14 Marks)

Answer

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Tags: Deferred Tax, Disclosure Requirements, Fair value adjustment, Goodwill, Non-Controlling Interests
Level: Level 2

Topic: Property, Plant, and Equipment (IAS 16)
Series: MAY 2015

FR – Nov 2014 – L2 – Q7b – Property, Plant and Equipment (IAS 16)

Prepare a statement of changes in Property, Plant and Equipment for Kwali Nigeria Plc.

Question

b. The following details are extracted from the non-current assets register of Kwali
Nigeria Plc at the year ended 30 September 2013:

Additional information:

(i) During the year ended 30 September 2013, the company incurred the
sum of N106,000,000 on the construction work in progress and this
resulted in the completion of a warehouse costing N325,000,000. The
warehouse was put to use on 1 June, 2013. The freehold property is
depreciated at a flat rate of 15% per annum on a straight-line basis.

(ii) The leasehold property was acquired on 1 October 2011 on 15 years
lease at a cost of N300,000,000. The company’s policy is to revalue the
property at market value at each year end. At 30 September 2013, the
property was valued at N204,600,000.

(iii) Plant acquired is depreciated at 25% per annum using the reducing
balance method while the leased plant is also depreciated at 25% using
the straight-line method.

(iv) One item of plant acquired for N48,000,000 on 1 October 2010 was
disposed on 30 September, 2013 for N36,000,000 while a new plant with
a higher capacity was acquired as a replacement for N65,000,000 on the
same date.

(v) All the additional pieces of information above are yet to be adjusted for
in the books of Kwali Nigeria Plc.

Required:

Prepare a statement of changes in Property, Plant and Equipment for inclusion in the
Financial Statements for the year ended 30 September 2013. (10 Marks)

Answer

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Tags: Financial Statements, IAS 16, Kwali Nigeria Plc, Non-current Assets
Level: Level 2

Topic: Property, Plant, and Equipment (IAS 16)
Series: NOV 2014

FR – Nov 2014 – L2 – Q7a – Property, Plant and Equipment (IAS 16)

Identify the elements of cost for PPE and provide examples of directly attributable costs.

Question

a. IAS 16 covers all aspects of accounting for Property, Plant and Equipment (PPE), including its measurement and qualification for recognition as an asset. The standard also describes the elements of cost, stating that some costs are directly attributable to the costs of PPE while some other costs fail to qualify as costs of an item of PPE.

Required:

In the context of IAS 16, identify the elements of cost of an item of Property, Plant, and Equipment, giving SIX examples of directly attributable costs. (5 Marks)

Answer

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Tags: Cost Elements, Directly Attributable Costs, IAS 16, Plant and Equipment, Property
Level: Level 2

Topic: Property, Plant, and Equipment (IAS 16)
Series: NOV 2014

FR – Nov 2014 – L2 – Q6 – Property, Plant and Equipment (IAS 16)

Analyze the Property, Plant, and Equipment of Skelewu Nigeria Limited and compute the deferred tax implications.

Question

Skelewu Nigeria Limited owns the following Property, Plant and Equipment as at 31 December 2011.

Additional pieces of information are:

(i) Plant and Machinery are depreciated on a straight-line basis over 5 years. The plant & machinery was acquired on 1 January 2011.
(ii) Land is not depreciated.
(iii) Buildings are depreciated on a straight-line basis over 25 years.
(iv) Depreciation on office buildings is not deductible for tax purposes, but for the plant and machinery; tax deductible is granted over a period of 3 years in the ratio 50:30:20 percent of cost consecutively.
(v) The accounting profit before tax amounted to N15,000,000 for the 2012 financial year and N20,000,000 for the year 2013. These figures include non-taxable revenue of N4,000,000 in year 2012 and N5,000,000 in year 2013.
(vi) Skelewu Nigeria Limited had a tax loss on 31 December 2011 of N12,500,000. The tax rate for year 2011 was 35% and 30% for each of the years 2012 and 2013.

Required:

a. In accordance with IAS 12 on Income Taxes, differentiate between Current Tax and Deferred Tax. (2 Marks)

b. Prepare the Deferred Tax Account for the year ended 31 December 2013. (10 Marks)

c. Advise the Directors of Skelewu Nigeria Limited on the reasons why it is necessary to recognize or make provision for Deferred Tax in the company’s Financial Statements. (3 Marks)

Answer

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Tags: Current Tax, Deferred Tax, Depreciation, Plant and Equipment, Property
Level: Level 2

Topic: Property, Plant, and Equipment (IAS 16)
Series: NOV 2014

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.

Question

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)

Answer

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Tags: Borrowing Costs, Capitalization, Financial Reporting, IAS 23, VITAMAX Plc
Level: Level 2

Topic: Property, Plant, and Equipment (IAS 16)
Series: NOV 2014

FR – Nov 2019 – L2 – Q1a – Property, Plant, and Equipment (IAS 16)

Explain the classification and measurement differences between investment properties and property, plant, and equipment.

Question

You are the Financial Controller of Uchena Nigeria plc. The company was established about 15 years ago. At the last annual general meeting of the company, a new Managing Director was appointed.

The new Managing Director is a non-finance executive with very little knowledge of accounting. He has requested for the past five years financial statements of the company for review.

He has prepared a list of issues based on his review as follows:

When I look at the statement of financial position of one of the past financial statements, one of the categories of non-current asset is investment properties and another category is property, plant, and equipment, in which all other properties are included. It is certain that the company invested in properties, so why do you have two categories for them in the statement of financial position? How did you decide what goes where?
A note to the financial statements states that investment properties are measured at their fair values and not depreciated. Don’t all non-current assets have to be depreciated over their estimated useful lives?
Another note to the financial statements states that property included in the property, plant, and equipment is measured at cost less accumulated depreciation rather than at fair value. Shouldn’t all properties be measured in financial statements on a consistent basis?
Finally, I can’t see from the financial statements where gains or losses relating to the measurement of investment properties are included; the profit statement includes two main components: profit or loss and other comprehensive income; where would the gains or losses go? Presumably, the treatment of gains or losses is the same for any non-current assets, which one is measured at fair value?

Required:

Provide answers to the issues raised by the Managing Director. You should justify your answers with reference to the relevant IFRS. (12 Marks)

Answer

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Tags: Depreciation, Fair Value, IFRS, Investment properties, Plant and Equipment, Property
Level: Level 2

Topic: Property, Plant, and Equipment (IAS 16)
Series: NOV 2019

CR – May 2021 – L3 – Q1c – Property, Plant and Equipment (IAS 16)

Record journal entries for PPE acquisition and related foreign exchange adjustments in the books of Ngono Plc.

Question

Answer

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Tags: Depreciation, Foreign Exchange, Journal Entries, PPE
Level: Level 3

Topic: Property, Plant, and Equipment (IAS 16)

FR – Nov 2023 – L2 – Q3b – Property, Plant, and Equipment (IAS 16)

Discuss financial implications of reclassifying investment property under cost and fair value models.

Question

The fair value of the building was as follows:

At December 31, 2017: N60 million
At December 31, 2022: N75 million

Required:

Discuss how the changes of use should be reflected in the financial statements of Young Shall Grow Limited:

If the company uses the cost model for its investment properties.
If the company uses the fair value model for its investment properties.

Answer

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Tags: Change in Use, IAS 40, Investment Property, Reclassification
Level: Level 2

Topic: Property, Plant, and Equipment (IAS 16)

FR – Nov 2023 – L2 – Q3a – Property, Plant, and Equipment (IAS 16)

Explain reclassification criteria for transferring investment property to PPE.

Question

a. If a property is transferred into or out of the category of property, plant and equipment (PPE), it might be reclassified as investment property or as no longer an investment property.

A transfer of investment property can only be made where there is a change of use of such property.

Answer

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Tags: Equipment, IAS Compliance, Investment Property, Plant, Property, Reclassification
Level: Level 2

Topic: Property, Plant, and Equipment (IAS 16)

FR – May 2016 – L2 – Q5b – Accounting Policies, Changes in Accounting Estimates, and Errors (IAS 8)

Assess the validity of the assistant accountant's suggestion on extending plant life for depreciation and illustrate its impact on the financial statements.

Question

Required:

Answer

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Level: Level 2

FR – May 2015 – L2 – SB – Q2 – Property Plant and Equipment

Determine disclosure requirements for separate financial statements and calculate equity, non-controlling interests, goodwill, and property valuation adjustments.

Question

Additional Information:

An equipment in Orijinmi Plc had a fair value of N360,000,000 above its carrying amount with a four-year remaining life. The group uses straight-line depreciation.
Orijinmi Plc had an unrecorded deferred tax liability of N10,000,000 as of March 31, 2014, with no goodwill impairment.
Non-controlling interests are valued at fair value at acquisition. Fair value of Orijinmi Plc’s non-controlling interests at acquisition was N6 per share.

Required: Calculate the following as at March 31, 2014:

Equity
Non-controlling Interests
Consolidated Goodwill
Property, Plant, and Equipment (14 Marks)

Answer

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Tags: Deferred Tax, Disclosure Requirements, Fair value adjustment, Goodwill, Non-Controlling Interests
Level: Level 2

Topic: Property, Plant, and Equipment (IAS 16)
Series: MAY 2015

FR – Nov 2014 – L2 – Q7b – Property, Plant and Equipment (IAS 16)

Prepare a statement of changes in Property, Plant and Equipment for Kwali Nigeria Plc.

Question

b. The following details are extracted from the non-current assets register of Kwali
Nigeria Plc at the year ended 30 September 2013:

Additional information:

(iii) Plant acquired is depreciated at 25% per annum using the reducing
balance method while the leased plant is also depreciated at 25% using
the straight-line method.

(v) All the additional pieces of information above are yet to be adjusted for
in the books of Kwali Nigeria Plc.

Required:

Prepare a statement of changes in Property, Plant and Equipment for inclusion in the
Financial Statements for the year ended 30 September 2013. (10 Marks)

Answer

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Tags: Financial Statements, IAS 16, Kwali Nigeria Plc, Non-current Assets
Level: Level 2

Topic: Property, Plant, and Equipment (IAS 16)
Series: NOV 2014

FR – Nov 2014 – L2 – Q7a – Property, Plant and Equipment (IAS 16)

Identify the elements of cost for PPE and provide examples of directly attributable costs.

Question

Required:

In the context of IAS 16, identify the elements of cost of an item of Property, Plant, and Equipment, giving SIX examples of directly attributable costs. (5 Marks)

Answer

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Tags: Cost Elements, Directly Attributable Costs, IAS 16, Plant and Equipment, Property
Level: Level 2

Topic: Property, Plant, and Equipment (IAS 16)
Series: NOV 2014

FR – Nov 2014 – L2 – Q6 – Property, Plant and Equipment (IAS 16)

Analyze the Property, Plant, and Equipment of Skelewu Nigeria Limited and compute the deferred tax implications.

Question

Skelewu Nigeria Limited owns the following Property, Plant and Equipment as at 31 December 2011.

Additional pieces of information are:

Required:

a. In accordance with IAS 12 on Income Taxes, differentiate between Current Tax and Deferred Tax. (2 Marks)

b. Prepare the Deferred Tax Account for the year ended 31 December 2013. (10 Marks)

c. Advise the Directors of Skelewu Nigeria Limited on the reasons why it is necessary to recognize or make provision for Deferred Tax in the company’s Financial Statements. (3 Marks)

Answer

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Tags: Current Tax, Deferred Tax, Depreciation, Plant and Equipment, Property
Level: Level 2

Topic: Property, Plant, and Equipment (IAS 16)
Series: NOV 2014

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.

Question

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 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)

Answer

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Tags: Borrowing Costs, Capitalization, Financial Reporting, IAS 23, VITAMAX Plc
Level: Level 2

Topic: Property, Plant, and Equipment (IAS 16)
Series: NOV 2014

FR – Nov 2019 – L2 – Q1a – Property, Plant, and Equipment (IAS 16)

Explain the classification and measurement differences between investment properties and property, plant, and equipment.

Question

You are the Financial Controller of Uchena Nigeria plc. The company was established about 15 years ago. At the last annual general meeting of the company, a new Managing Director was appointed.

The new Managing Director is a non-finance executive with very little knowledge of accounting. He has requested for the past five years financial statements of the company for review.

He has prepared a list of issues based on his review as follows:

When I look at the statement of financial position of one of the past financial statements, one of the categories of non-current asset is investment properties and another category is property, plant, and equipment, in which all other properties are included. It is certain that the company invested in properties, so why do you have two categories for them in the statement of financial position? How did you decide what goes where?
A note to the financial statements states that investment properties are measured at their fair values and not depreciated. Don’t all non-current assets have to be depreciated over their estimated useful lives?
Another note to the financial statements states that property included in the property, plant, and equipment is measured at cost less accumulated depreciation rather than at fair value. Shouldn’t all properties be measured in financial statements on a consistent basis?
Finally, I can’t see from the financial statements where gains or losses relating to the measurement of investment properties are included; the profit statement includes two main components: profit or loss and other comprehensive income; where would the gains or losses go? Presumably, the treatment of gains or losses is the same for any non-current assets, which one is measured at fair value?

Required:

Provide answers to the issues raised by the Managing Director. You should justify your answers with reference to the relevant IFRS. (12 Marks)

Answer

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Tags: Depreciation, Fair Value, IFRS, Investment properties, Plant and Equipment, Property
Level: Level 2