Zeta Bio Tech Ltd (Zeta) is engaged in manufacturing of biotechnology products with the below non-current assets as at 30 November 2019: Land and buildings Plant and equipment $’000 $’000 Cost/revalued amount 54,000 21,000 Accumulated depreciation (825) (10,710) Carrying amount 53,175 10,290 Zeta's depreciation policy is 50 years straight-line with no residual value for building and warehouse and 30% reducing balance for plant and equipment. It adopts revaluation model for land and buildings and warehouse; and cost model for plant and equipment in accordance with HKAS 16 ‘Property, Plant and Equipment’. Zeta opts for transfer from revaluation reserves to retained earnings only upon derecognition. It is also Zeta’s policy to revalue the land and buildings on every two years’ basis. The end of its reporting period is 30 November. During the year ended 30 November 2020, Zeta has the following movement on noncurrent assets. (1) The carrying amount of land and buildings should be revalued on 30 November 2020 to $52.5 million (including $24 million in respect of the land). The land and buildings as at 1 December 2019 were all purchased on 1 December 2008 and were last revalued on 30 November 2018 to $54 million (including $21 million in respect of the land). Up to 1 December 2019, accumulated revaluation deficit for land is $2.25 million and accumulated revaluation surplus for buildings is $3 million. No land or buildings were disposed of during the year ended 30 November 2020. (2) On 1 December 2019, Zeta commenced the construction of a new warehouse facility on a piece of land it owns. Costs incurred were as follows: $’000 Architect's fees 600 Construction materials 3,600 Salaries of internal staff involved in construction 540 Allocation of company overheads (head office costs) 66 Cost of opening the new warehouse 45 The construction was completed on 31 May 2020 and the warehouse came into use the following day. The construction materials cost was incurred on 1 December 2019 and the construction activities began on the same date. Construction was partly financed by a new 2-year $3 million loan borrowed specifically from a local bank at an annual rate of 4%, issued on 1 December 2019. Interest is paid in arrears on 30 November with an effective interest rate of 6% per year. There is a legal requirement to dismantle warehouse in 50 years’ time from 31 May 2020 and the expected cost of dismantling the warehouse is about $7.5 million on 31 May 2070. Zeta discounts dismantling costs at 5% per annum. The present value of $1 over 50 years at 5% is 0.0872. The director of Zeta is not certain how to measure the cost of the warehouse. 3 (3) On 1 June 2020, Zeta disposed of a specific machinery (under the category of plant and equipment) with a carrying amount of $2.573 million at 1 December 2019 (original cost $5.25 million) for $1.65 million by cheque. Other than the above buildings classified under HKAS 16, Zeta also has a portfolio of buildings (or part of the buildings) treated as investment properties as at 30 November 2020. They are as follows: (i) Building being self-constructed for future use as investment property (ii) An unused flat let out to directors of Zeta (iii) Former warehouse, unoccupied and no longer required as a warehouse – future use to be determined The newly appointed accounting manager of Zeta is not certain about the accounting classification of the above three buildings. Required: Round all figures to the nearest $’000 (a) Prepare journal entries to record the transactions for Zeta for the year to 30 November 2020 with regards to land and building. (b) Show description of items that make up the cost of warehouse as at 31 May 2020 with detail breakdown of each costs. You need to give explanation for item that cannot capitalize as part of the warehouse. (c) Prepare journal entries to record the transactions for Zeta from 1 December 2019 up to 1 June 2020 with regards to the disposal of a specific machinery.
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
Zeta Bio Tech Ltd (Zeta) is engaged in manufacturing of biotechnology products with
the below non-current assets as at 30 November 2019:
Land and buildings Plant and equipment
$’000 $’000
Cost/revalued amount 54,000 21,000
Carrying amount 53,175 10,290
Zeta's depreciation policy is 50 years straight-line with no residual value for building
and warehouse and 30% reducing balance for plant and equipment. It adopts
revaluation model for land and buildings and warehouse; and cost model for plant and
equipment in accordance with HKAS 16 ‘Property, Plant and Equipment’. Zeta opts for
transfer from revaluation reserves to
also Zeta’s policy to revalue the land and buildings on every two years’ basis. The end
of its reporting period is 30 November.
During the year ended 30 November 2020, Zeta has the following movement on noncurrent assets.
(1) The carrying amount of land and buildings should be revalued on 30 November
2020 to $52.5 million (including $24 million in respect of the land). The land and
buildings as at 1 December 2019 were all purchased on 1 December 2008 and were
last revalued on 30 November 2018 to $54 million (including $21 million in
respect of the land). Up to 1 December 2019, accumulated revaluation deficit for
land is $2.25 million and accumulated revaluation surplus for buildings is $3
million. No land or buildings were disposed of during the year ended 30
November 2020.
(2) On 1 December 2019, Zeta commenced the construction of a new warehouse
facility on a piece of land it owns. Costs incurred were as follows:
$’000
Architect's fees 600
Construction materials 3,600
Salaries of internal staff involved in construction 540
Allocation of company
Cost of opening the new warehouse 45
The construction was completed on 31 May 2020 and the warehouse came into
use the following day. The construction materials cost was incurred on 1 December
2019 and the construction activities began on the same date.
Construction was partly financed by a new 2-year $3 million loan borrowed
specifically from a local bank at an annual rate of 4%, issued on 1 December 2019.
Interest is paid in arrears on 30 November with an effective interest rate of 6% per
year.
There is a legal requirement to dismantle warehouse in 50 years’ time from 31 May
2020 and the expected cost of dismantling the warehouse is about $7.5 million on
31 May 2070. Zeta discounts dismantling costs at 5% per annum. The present
value of $1 over 50 years at 5% is 0.0872.
The director of Zeta is not certain how to measure the cost of the warehouse.
3
(3) On 1 June 2020, Zeta disposed of a specific machinery (under the category of plant
and equipment) with a carrying amount of $2.573 million at 1 December 2019
(original cost $5.25 million) for $1.65 million by cheque.
Other than the above buildings classified under HKAS 16, Zeta also has a portfolio of
buildings (or part of the buildings) treated as investment properties as at 30 November
2020. They are as follows:
(i) Building being self-constructed for future use as investment property
(ii) An unused flat let out to directors of Zeta
(iii) Former warehouse, unoccupied and no longer required as a warehouse – future
use to be determined
The newly appointed
classification of the above three buildings.
Required:
Round all figures to the nearest $’000
(a) Prepare
(b) Show description of items that make up the cost of warehouse as at 31 May 2020
with detail breakdown of each costs. You need to give explanation for item that cannot capitalize as part of the warehouse.
(c) Prepare journal entries to record the transactions for Zeta from 1 December 2019
up to 1 June 2020 with regards to the disposal of a specific machinery.
(d) Discuss the accounting classification regarding the three investment properties
in the
required to provide any calculation but you need to make reference to relevant HKFRSs in your discussion.
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