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Diamond is a trading company making up its accounts regularly to 31 December each year. At 1 January
2015 the following balances existed in the records of Diamond:
Land – cost
Buildings – cost
Aggregate depreciation charged on buildings to 31 December 2014
Office equipment – cost
Aggregate depreciation charged on office equipment to 31 December 2014
The company’s depreciation policies are as follows:
Land – no depreciation
Buildings – depreciation charged at 2% per annum on cost on the straight line basis.
Office equipment – depreciation charged at 12½% per annum on the straight line basis.
A full year’s depreciation is charged in the year of acquisition of all assets and none in the year of
During the two years to 31 December 2016 the following transactions took place:
Year ended 31 December 2015:
10 June Office equipment purchased for $16,000. This equipment was to replace
some old items which were given in part exchange. Their agreed part exchange
value was $4,000. They had originally cost $8,000 and their carrying amount was
$1,000. The company paid the balance of $12,000 in cash.
8 October An extension was made to the building at a cost of $50,000.
Year ended 31 December 2016:
1 March
Office equipment which had cost $8,000 and with a written-down value
of $2,000 was sold for $3,000.
In preparing financial statements at 31 December 2016 it was decided to revalue the land upwards by
$200,000 to reflect a recent survey.
Write up the necessary ledger accounts to record these transactions for the TWO years
ended 31 December 2016. (Separate cost (or valuation) and aggregate depreciation
accounts are required; do not combine cost and depreciation in a single account.)
Explain the purpose of depreciation according to IAS 16 “Property, Plant and
Equipment”, and the factors that should be taken into account in assessing the amount
of depreciation required each year.
Lion is a company producing medicinal drugs. At 1 April 2016 the following balances existed in the
Deferred development expenditure $1,200,000
Project Q. $800,000. This is the balance remaining of expenditure totalling $1,000,000 on a completed
project which is being amortised on the straight line basis over 10 years.
Project R. $400,000. This is the accumulated costs to 31 March 2016 of developing a new drug. The
project was completed in January 2017 and sales of the drug are expected to begin in July
Equipment used in research $300,000 (cost $500,000, depreciation to date $200,000).
During the year ended 31 March 2017 the following costs were incurred:
Project R
Costs to complete $250,000
Project S
(a research project) $140,000
Purchase of testing equipment for use in the research department $180,000.
All equipment has an estimated useful life of five years, and a full year’s depreciation is charged in the
year of acquisition.
Calculate the figures to be included in Lion’s statement of profit or loss for the year ended
31 March 2017 and statement of financial position as at that date, and state the headings
under which they will appear.
Prepare the disclosure notes required by IAS 38 “Intangible Assets”. (The note detailing the
accounting policy for research and development expenditure is NOT required.)
A company manufacturing aircraft engages in a number of research and development projects.
At 1 January 2016 the company’s records showed total capitalised development costs of $18 million
made up as follows:
Project A17:
This project was completed in 2015 at a total cost of $16 million
and is being amortised over eight years on the straight line basis,
beginning on 1 January 2015.
Project J9:
This project began in 2014 and the $4 million balance represents
expenditure qualifying for capitalisation to 31 December 2015 This
project is due to be completed in 2019
During the year ended 31 December 2016 the following further expenditure was incurred:
Project J9: Further expenditure qualifying for capitalisation $1,500 Project A20:
Investigation into new materials for aircraft construction
Calculate the amounts for research and development to be included in the company’s
statement of profit or loss and statement of financial position for the year ended 31
December 2016.
Discuss the principle accounting concepts applicable to the accounting treatment of
development expenditure. You are NOT required to provide the criteria for recognition of
an intangible asset arising from development in IAS 38 Intangible Assets.