nology Ltd Case Hua Fat Technology Ltd (Hua Fat) is a global telecommunication equipment manufacturer. The company was granted a piece of land by the government to develop its 5G business. On 1st January 2018, the company started to construct a property at the site. The property was used as a testing laboratory (the laboratory) to serve the company’s customers. The construction costs relating to the laboratory were: $000 Cost of construction materials before trade discount of 10% 50,000 Salary of construction workers for six months to 30 June 2018 4,800 Overheads related to the construction 3,600 Payment to external consultants related to the construction 2,
nology Ltd Case Hua Fat Technology Ltd (Hua Fat) is a global telecommunication equipment manufacturer. The company was granted a piece of land by the government to develop its 5G business. On 1st January 2018, the company started to construct a property at the site. The property was used as a testing laboratory (the laboratory) to serve the company’s customers. The construction costs relating to the laboratory were: $000 Cost of construction materials before trade discount of 10% 50,000 Salary of construction workers for six months to 30 June 2018 4,800 Overheads related to the construction 3,600 Payment to external consultants related to the construction 2,
nology Ltd Case Hua Fat Technology Ltd (Hua Fat) is a global telecommunication equipment manufacturer. The company was granted a piece of land by the government to develop its 5G business. On 1st January 2018, the company started to construct a property at the site. The property was used as a testing laboratory (the laboratory) to serve the company’s customers. The construction costs relating to the laboratory were: $000 Cost of construction materials before trade discount of 10% 50,000 Salary of construction workers for six months to 30 June 2018 4,800 Overheads related to the construction 3,600 Payment to external consultants related to the construction 2,
Hua Fat Technology Ltd (Hua Fat) is a global telecommunication equipment manufacturer. The company was granted a piece of land by the government to develop its 5G business. On 1st January 2018, the company started to construct a property at the site. The property was used as a testing laboratory (the laboratory) to serve the company’s customers. The construction costs relating to the laboratory were:
$000
Cost of construction materials before trade discount of 10% 50,000
Salary of construction workers for six months to 30 June 2018 4,800
Overheads related to the construction 3,600
Payment to external consultants related to the construction 2,000
Expected dismantling and restoration costs (note 3) 400
Notes:
Hua Fat received 5% cash discount from the supplier as payment was settled within one
month according to the purchase contract.
The laboratory was completed and was put into use on 1 July 2018.
The laboratory is expected to have a useful life of ten years. According to the
agreement with the government, Hua Fat is required to dismantle the laboratory and restore the site to its original condition when the laboratory ceases to be used. These restoration costs are estimated in present value.
Hua Fat believes that within 5 years, the laboratory will need a major repair to ensure that it continues to generate economic benefits for the next five years. The estimated cost of the repair at 30 June 2023 was $6,000,000.
Hua Fat passed the environmental, health and safety (EHS) review conducted by the government and obtained a license to operate the laboratory. A one-time fee of $100,000 was paid on 30 June 2018.
The fair value of the laboratory was $63,000,000 on 31 December, 2018.
In 2019, Hua Fat sold all its 5G business and removed all the equipment from the testing laboratory. The company continued to hold the property for investment purposes and rented it out to a competitor on 1 July 2019 in an arm’s length transaction. On that day, the fair value of the property was $60,000,000. On 31 December 2019, the fair value of the property was $55,000,000.
Hua Fat used the revaluation model for its property, plant and equipment and fair value model for its investment properties. The company revalues its property, plant and equipment at every year-end but it does not transfer the revaluation surplus to retained earnings annually. The company has its financial year-end date on 31 December.
Required:
(a) With reference to HKAS 16, explain the rationale that the laboratory should be treated as ‘Property, plant and equipment’ when it was put into use on 1 July 2018.
(b) Determine the initial cost of the laboratory on 1 July 2018.
(c) Using the above information and based on the appropriate accounting standards in Hong Kong, prepare all necessary accounting journal entries relating to the property for the years 2018 and 2019. Show all dates.
Show all workings. Narrative is not required.
Definition Definition Indirect costs incurred while producing goods or services. Overhead costs cannot be directly attributed to products or services. Overhead includes indirect material cost, indirect labor cost, rent, utilities expenses, and depreciation. Since these costs directly affect the profitability of a company, managing overhead becomes an important task for management.
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