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A.A memo for Jennifer Bache to brief her on the requirements of IAS16 in relation to the transactions noted below. Your memo should be approximately 1,500 words long and should explain what the accounting standard states, show how you have applied the accounting standard to the transaction, what amount should be capitalised and any further areas of concern/ issues you feel need to be brought to Jennifer’s attention in relation to these transactions.
You have recently been appointed as the financial accountant at Mine-Tech Ltd. Although the current book keeper is good at the day to day posting of transactions he doesn’t really understand the requirements of a set of publishable financial statements, and the company’s directors have appointed you to prepare the financial statements going forward and ensure that all transactions are recorded in accordance with the requirements of the accounting standards.
The following complex transactions were noted during the year and although the book keeper has paid any cash amounts required and recorded them correctly in the cash account he has posted the other side of the transactions to a suspense account as he was unsure about how to treat them.
1) The company has developed a new manufacturing process and has invested £169,752 on new plant and machinery requirement to run this process.
This comprises of
2) They have made a deal with a local mining company to acquire 5 used motor vehicles no longer required by the mining company in exchange for a hover 3000 extraction system which has a market value of £50,000. As this was not for cash and the machine had cost £30,000 to manufacture the book keeper was not sure how this should be accounted for.
3) In 2005 Mine-Tech Ltd purchased a new warehouse for £250,000, which it has depreciated over 50 years in line with rest of its property. In 2010 the property market started to pick up and the company decided to revalue this property up to £275,000 then this year, 4 years later the impact of the economic crisis was reflected in the property prices of commercial warehouses and the property was impaired and the fair value of the warehouse was £200,000. This has been correctly accounted for in previous years and needs to be accounts for in higher current year.
4) Mine-Tech Ltd has a higher specialised piece of equipment that they have purchased during the year for £570,000. The equipment has a usefulness economic life of 10 yeast but the filters and turbines will need to be overhauled and replaced on a 4 yearly basis. This will result in the company having to shut the process down for a two-week basis.
A mining expert has analysed the costs of the equipment as follows:
5) On 1 January 2014 Mine-Tech Ltd borrowed £10million at an interest rate of 6% to fund the construction of a new manufacturing site. Land at a cost of £4million was acquired on 1 February 2014 and construction commenced on 1 May 2014. Construction was completed on 30 September 2014 at an additional cost of £9.5million. Although the plant was usable from that date production did not commence until 1 December 2014 due to marketing delays. No investment income was earned on the temporary investment of any unused funds.