1. PPE (1%)
Asiana is an airline which treats its aircraft as complex non‐current assets, accounted for under
the historical cost model. The cost and other details of an aircraft are:
Interior cabin fittings – installed 1
April 20X5
Engine – installed 1 April 20X5
$000
28,000
Estimated life
5 years
9,500
36,000 flying hours
From 01 April 20X8 the aircraft flew for 1,600 hours for the six months to 30 September 20X8.
On 1 October 20X8 the aircraft suffered a ‘bird strike’ accident which damaged the engine
beyond repair. This was replaced by a new engine with a life of 36,000 hours at cost of $11.7
million.
Company’s year end is 31 March 20X9.
a) What is the depreciation to be charged in respect of the engine for the 6 month period to
1 October 20X8?
$__________
b) Which of the following explains the correct accounting treatment of the engine?
A. Write off the damaged engine, capitalise the new engine and depreciate over 24,000 hours
B. Treat the $11.7 million as a repair to the damaged engine and continue to depreciate the
engine as in the first 6 months
C. Capitalise $6 million to replace the damaged engine, expense the other $5.7 million
D. Write off the damaged engine, capitalise the new engine and depreciate over 36,000 hours
c) As the aircraft was out of service for some weeks due to the accident, Asiana 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 Asiana to
substantially increase the air fares on this aircraft.
What is the carrying amount of the cabin fittings as at 31 March 20X9? Reflect your
working.
$__________
2. Borrowing costs (0.7%)
On 1 January 20X9 Posh Co. borrowed $1.5 mln to finance the production of two assets, both of
which were expected to take a year to build.
The loan rate was 9% and Posh Co can invest surplus funds at 7%.
Work started during 20X9. The loan facility was drawn down and incurred on 1 January 20X9,
and was utilised as follows, with the remaining funds invested temporarily.
1 January 20X9
1 July 20X9
Asset A
$'000
250
250
Asset B
$'000
500
500
Required:
Calculate
 the borrowing costs which may be capitalised for each of the assets AND consequently
the cost of each asset as at 31 December 20X6.
3. Government grants (0.3%)
On 1 January 20X2 Fabio Co. received $1m from the local government on the condition that
they employ at least 80 staff each year for the next 5 years. Due to an economic downturn and
reduced consumer demand on 1 January 20X3, Fabio no longer needed to employ any more staff
and the conditions of the grant required full repayment.
What should be recorded in the financial statements on 1 January 20X3?
A
B
C
D
Reduce deferred income balance by $750,000
Reduce deferred income by $750,000 and recognise a loss of $250,000
Reduce deferred income by $1,000,000
Reduce deferred income by $1,000,000 and recognise a gain of $250,000
4. Intangible Assets (1.5%)
Akona Co prepares financial statements to 30 June each year. During the year to 30 June
20X5, the company spent $550,000 on new plant as follows:
Plant cost
Delivery to site
Building alterations to accommodate the plant
Costs of initial testing of the new plant
$000
525
3
12
2
Plant operator training costs
8
Akona Co’s fixtures and fittings were purchased on 1 July 20X2 at a cost of $50,000. The
directors have depreciated them on a straight line basis over an estimated useful life of eight
years assuming a $5,000 residual value. At 1 July 20X4, the directors realise that the remaining
useful life of the fixtures is five years. There is no change to the estimated residual value.
Akona Co began a research project in October 20X3 with the aim of developing a new
type of machine. If successful, Akona Co will manufacture the machines and sell them to
customers as well as using them in their own production processes. During the year ended 30
June 20X4, costs of $25,000 were incurred on conducting feasibility studies and some market
research. During the year ended 30 June 20X5, a further $80,000 was incurred on constructing
and testing a prototype of the machine
1) In accordance with IAS 16 Property, Plant and Equipment, what is the value of additions to
plant (to be capitalized) for Akona Co for the year ended 30 June 20X5?
$__________
2) Which of the following is TRUE in relation to the change in the remaining useful life of
the fixtures and fittings?
A It is a change of accounting policy which should be retrospectively applied
B It is a change of accounting policy which should be disclosed in the notes to the financial
statements
C It is a change of accounting estimate which should be retrospectively applied D It is a
change of accounting estimate which should be prospectively applied
3) In accordance with IAS 16, what is the depreciation charge for the fixtures and fittings
for Akona Co for the year ended 30 June 20X5?
$__________
4) In accordance with IAS 38 Intangible Assets, what is the correct treatment of the $25,000
costs incurred on the research project by Akona Co during the year ended 30 June 20X4?
A They should be recognised as an intangible non‐current asset as future economic benefits are
expected from the use and sale of the machinery
B They should be written off to profit or loss as an expense as they are research costs at this
date
C They should be included in tangible non‐current assets as machinery which will be put into
use once completed
D They should be set against a provision made for the estimated total cost of the project which
was set up at the start of the research
5) In accordance with IAS 38, which of the following is true when Akona Co moves to the
production and testing stage of the prototype during the year ended 30 June 20X5?
A The project has moved to the development stage. If the IAS 38 development expenditure
criteria are met, Akona Co can choose whether or not to recognise the $80,000 costs as an
intangible non‐current asset
B The project is still in its research stage and the $80,000 costs incurred by Akona Co cannot be
recognised as an intangible non‐current asset until a product is ready for sale
C The project has moved to the development stage. If the IAS 38 development expenditure
criteria are met, Akona Co must recognise the $80,000 costs as an intangible non‐current asset
D The project is still in its research stage and so Akona Co must expense the $80,000 costs to
profit or loss
5. Impairment (1.5%)
Palada Co. has a year end of 31 December and operates a factory which makes processors for
notebooks. It purchased a machine on 1 July 20X3 for $80,000 which had a useful life of twelve
years and is depreciated on the straight‐line basis, time apportioned in the years of acquisition
and disposal. The machine was revalued to $81,000 on 1 July 20X4. There was no change to its
useful life at that date. A fire at the factory on 1 October 20X6 damaged the machine, leaving it
with a lower operating capacity. The accountant considers that Palada Co. will need to recognise
an impairment loss in relation to this damage and has ascertained the following information at 1
October 20X6:
(1) The carrying amount of the machine is $60,750.
(2) An equivalent new machine would cost $90,000.
(3) The machine could be sold in its current condition for a gross amount of $45,000.
Dismantling costs would amount to $2,000.
(4) In its current condition, the machine could operate for three more years which gives it a value
in use figure of $38,685.
1) In accordance with IAS 16 Property, Plant and Equipment, what is the depreciation
charged to Palada Co.’s statement of profit or loss in respect of the machine for the year
ended 31 December 20X4?
$_________________
2) What is the total impairment loss associated with Palada Co.’s machine at 1 October
20X6?
$_______________
3) The accountant has decided that it is too difficult to reliably attribute cash flows to this
one machine and that it would be more accurate to calculate the impairment on the basis
of the factory as a cash‐generating unit.
In accordance with IAS 36 Impairment of Assets, which TWO of the following are
TRUE regarding cash generating units?
A A cash‐generating unit to which goodwill has been allocated should be tested for impairment
every five years.
B A cash‐generating unit must be a subsidiary of the parent.
C There is no need to consistently identify cash‐generating units based on the same types of
asset from period to period.
D A cash‐generating unit is the smallest identifiable group of assets for which independent cash
flows can be identified.
E Assets in a cash‐generating unit should never be impaired below their recoverable amount.
4) On 1 July 20X7, it is discovered that the damage to the machine is worse than originally
thought. The machine is now considered to be worthless and the recoverable amount of
the factory as a cash‐generating unit is estimated to be $950,000. At 1 July 20X7, the
cash‐generating unit comprises the following assets:
Building
Plant and equipment (including the
damaged machine at a carrying amount of
$35,000)
Goodwill
Net current assets (at recoverable amount)
Total
$000
500
335
85
250
1,170
In accordance with IAS 36 Impairment of Assets, what will be the impairment loss and
carrying amount of Palada Co.’s plant and equipment when the impairment loss has been
allocated to the cash‐ generating unit (carrying amount post-impairment)?
$_____________