Answer 1

Pak Land Limited

Notes to the Financial Statements
For the Year Ended December 31, 2007

Property, Plant and Equipment Rupees in thousand

Freehold Office
Plant and Motor
Land & Equipment Total
Equipment Vehicles
Building & Fixture
Cost/Valuation
Balance as at January 01, 2007 1,440 1,968 449 888 4,745
Adjustment for depreciation (144) - - - (144)
Revaluation Surplus (W – 01) 904 - - - 904
Additions 500 75 35 22 632
As at December 31, 2007 2,700 2,043 484 910 6,137

Accumulated Depreciation
Balance as at January 01, 2007 144 257 194 583 1,178
Revaluation Adjustment (144) - - - (144)
For the year (W – 01) 60 (W – 03) 233 (W – 02) 87 182 562
As at December 31, 2007 60 490 281 765 1,596

Written Down Value

As at December 31, 2007 2,640 1,553 203 145 4,541
As at December 31, 2006 1,296 1,711 255 305 3,567

01. The freehold land and building has been revalued at open market value of Rs. 2,200,000 and this
has resulted in a surplus of Rs. 904,000. The additions during the year are stated at cost.
02. The company’s depreciation policy on motor vehicles has been changed from a rate of 25% per
annum on cost to a rate of 30% per annum on reducing balance method in order to give a more
relevant presentation of results and of the financial position. The effect of this change has been
to reduce the depreciation charge for the year by Rs. 34,000 (Rs. 121,000 – Rs. 87,000).

Working Notes
W – 01. Calculation of revaluation surplus on freehold land and building. Rs. ,000
Cost 1,440
Less: Accumulated Depreciation (144)
Carrying amount 1,296
Fair Value 2,200
Surplus 904

Depreciation for the year (2,700/45 years) 60

W – 02 Calculation of depreciation for the year on motor vehicles
Cost 449
Less: Accumulated depreciation (194)
Additions 35
Carrying amount 290
Depreciation for the year 290 x 30% 87
W – 03 Calculation of depreciation for the year on plant and equipment
Cost 1,968
Less: grinding machine (298)
Additions 75
1,745
Depreciation (1,745 x 10%) 175
Grinding machine
Cost less residual value (298 – 8) 290
Accumulated depreciation (58)
232
Depreciation charged after life change (232/4) 58
Total depreciation (175 + 58) 233

A.2
a) Journals
Debit Credit
2 January 20X2
Cost: plant – engine 1 500,000
Cost: plant - conveyor belt and
fittings 2,000,000
Cost: plant - outer structure 800,000
Bank/ liability 4 300,000
Purchase of bottling plant
5 January 20X2
Cost: plant – engine 250,000
Cost: plant - conveyor belt and
fittings 250,000
Cost: plant - outer structure 250,000
Bank/ liability 750,000
Delivery and installation: 1/3 allocated to each component
16 January 20X2
Staff training (expense) 60,000
Bank/ liability 60,000
Staff training expensed (not a ‘directly attributable cost’ in bringing the plant to a location and
condition that enabled it to be used as intended by management)
19 January 20X2
Cost: plant – engine 11,000
Cost: plant - conveyor belt and
fittings 11,000
Cost: plant - outer structure 11,000
Bank/ liability 33,000
Testing that plant. fully operational: 1/3 allocated to each component
21 January 20X2
Entertainment/ advertising
(expense) 210,000
Bank/ liability 210,000
‘Bottling plant launch party ’ expensed
31 December 20X2
Depreciation 799 173
Accumulated depreciation: plant - engine 231 183
Accumulated depreciation: plant - conveyor belt and fittings 259,073
Accumulated depreciation: plant - outer structure 308 917

Depreciating each component of plant separately:

Engine = (1 500,000 + 250,000 + 11,000 - 500,000) / 5 years x 11/12 231,183
Conveyor belt etc = (2,000,000 + 250,000 + 11,000 - 0) / 8 years x 11/12 259,073
Outer structure = (800,000 + 250,000 + 11,000 - 50,000) / 3 years x 11/12 308,917
799173
 Depreciation starts from the date that the asset was available for use i.e 1 February 20X2:
31 December 20X3
Depreciation 871 825
Accumulated depreciation: plant - engine 252 200
Accumulated depreciation: plant - conveyor belt and fittings 282 625
Accumulated depreciation: plant - outer structure 337,000
Depreciating each component of plant separately:
Engine = (1 500,000 + 250,000 + 11,000 - 500,000) / 5 years 252,200
Conveyor belt etc = (2,000,000 + 250,000 + 11,000 -0) / 8 years 282,625
Outer structure = (800,000 + 250,000 + 11,000 - 50,000) / 3 years 337,000
871,825

Comments:
There is no journal entry allocating the operating loss incurred during March 20X2 (the excess expenses
incurred over income earned) to the plant since this cost was incurred after the plant had been brought
to a location and put into a condition that enabled it to be used as intended by management.
Depreciation is calculated on each individual component separately.
Depreciation begins when the asset is available for use as intended by management.
Depreciation does not cease when the asset is temporarily idle.

b) Disclosure
ANCIENT WATERS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 20X3
Land Bottling Plant Total
Cost
Opening Balance 4,000,000 5,083,000 9,083,000
Addition - - -
Deletion - - -
Closing Balance 4,000,000 5,083,000 9,083,000
Acc Depreciation
Opening Balance - 799,173 799,173
For the year - 871,825 871,825
Disposal Adjustment - - -
Closing Balance - 1,670,000 1,670,000
Carrying Amount 4,000,000 3,412,000 7,412,000
Accounting Policies:
1. PPE is stated at cost less accumulated depreciation.
2. Depreciation is provided on all assets, except land. The plant is made up of three significant
components, the cost of which is as follows:
Depreciation of component: Cost price Residual value Expected useful life
Engine 500,000 500,000 5 years
Conveyer Belt and finings 2,000,000 - 8 years
Outer structure 800,000 50,000 3 years