FINANCIAL REPORTING AND ANALYSIS

Financial Reporting and Analysis

Online Exam

Question 1: On 1st April 2011 the company bought plant and equipment for $15 million. It expected the life of the assets to be 10 years. The plant and equipment has been contaminated by chemicals used in processing in the plant and the plant must be decontaminated at the end of its useful life. The present value of the decontamination process at an 8% discount rate is $5 million. The financial statements have had a charge of $1.5 million per year allocated for depreciation and half a million dollars provision for the removing the contamination.

Purchase: $15 million

Life: 10 years

Present Value: $5 million @ 8%

Depreciation: S1.5 m

Journal Entry

Plant And Equipment 15M

Cash/Account Rece15M

Depreciation expense1.5M

Accumulated Depreciation1.5M

The value for plant and equipment will be placed on balance sheet valuing 15 M while Accumulated Depreciation will also be placed in balance sheet valuing 15 M. as far as Cash/Account Rece worth of 15M will be placed on the current asset portion in balance sheet and Depreciation expense will be part of income statement in operating expenses.

Question 2: On 1st Apr-il 2011 Greatpea disposed of work in progress with a carrying value of $3 million for $5 million. However the estimated value in the market of the work in progress was greater than $5 million. The work in prnogress will not be ready for sale until 31st March 2015. Greatpea has an option to buy back the wori in progress at any time up to 31st March 2015 at a pnrce of $5 million plus an interest charge of 10% p.a.. compounding on a yeariy basis from 1st Apr-il 2011. There are also preservation costs to the work in progress which amounts to $300,000 for the current year and had been included in the trade receivables in the name of the purchaser. The purchaser will pay the accumulated costs of storage to 31st March 2015 if Greatpea has not repurchased the work in progress. The sale has been included in Greatpea's revenue.

Work In Progress: $3 million to $5 million

Market value of Work In Progress: more than $5 million

Work In Progress buy back: $5 million + 10%

Preservation Costs: $300,000

Work in progress is accounted at cost and the rule for WIP profit should only be recognized when it is realized and also uses the matching concept of matching income with expenses. According to the IAS, ...