Financial Reporting And Analysis

Instructions: Answer BOTH following questions

[Question 1]

During the year ended 30 September 2019, Akwak entered the following transactions:

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(i) On 1 September 2019, Akwak sold a smelting machine to a customer and agreed to service the machine for a two-year period from 1 September 2019 for no additional charge. The total amount paid on the 31 January 2020 by the customer is $1 620,000. The stand-alone selling price of the machine was $1 400,000 and Akwak would normally expect to receive $280,000 in consideration for providing two years’ servicing of the machine. The alternative amounts receivable is to be treated as variable consideration.

(ii) On 20 September 2019, Akwak sold 200 identical items to a customer for $4,000 each. The items cost Akwak $3 200 each to manufacture. The terms of sale are that the customer has the right to return the goods for a full refund within three months. After the three-month period has expired the customer can no longer return the goods and payment becomes immediately due. Akwak has entered into transactions of this type with this customer previously and can reliably estimate that 4% of the products are likely to be returned within the three-month period.

Required:


Akwak prepares financial statements to 30 September each year.

  1. In part (i) above, use the five-step process according to IFRS 15 to determine if and when revenue from contracts with customers would be realized. (10 marks)
  2. In part (ii) above, explain and show how the transactions would be reported in the financial statements of Akwak for the year ended 30 September 2019. (5 marks)

[Question 2]

On 1 January 2020, Jennings Limited opened a new plant in Providenciales, TCI.
The following costs were incurred during January 2020 in respect of the new plant (all excluding VAT):
$
Invoiced price of the plant 60 000 000
Direct costs of testing of plant to ensure

that it is operating in the manner intended

by management

2 000 000
Proceeds from the sale of the

goods produced in testing (as scrap)

( 600 000)
Costs incurred in selling the scrap

produced during testing

100 000
Plant opening function for dignitaries,

staff and clients

1 000 000
From 1 February 2020, the plant was ready to operate in the manner intended by management. The plant incurred an operating loss of $5 000 000 for the month ended 28 February 2020 primarily due to initial low orders levels. Production levels reached break-even point in early March 2020, and thereafter the plant operated profitably.
Environmental legislation requires that the site upon which the plant is developed be rehabilitated by Jennings Limited at the end of the plants useful economic life that has been reliably estimated at 10 years. On 1 January 2020, an environmental restoration provision of$ of $1 million was, in accordance with IAS 37, raised in this respect.
Required:
Calculate the cost of the plant in accordance with IAS 16 – Property, plant and equipment. Briefly support your answer. (10 marks)

Total 25 marks

 

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