Contents

IAS 2TASKS.............................................................................................................2

IAS 2 TEST.............................................................................................................11

IAS 37 TASKS........................................................................................................22

IAS 37 TEST...........................................................................................................26

IAS 16, 40 TASKS..................................................................................................33

IAS 16, 40 part 2 TASKS........................................................................................44

IAS 36 40 TEST......................................................................................................59
IAS 2TASKS
Task 1
Cole's business sells three products X, Y and Z. The following information was
available at the year-end:
X Y Z
Cost 7 10 19
Fair value less further costs to sell (NRV) 10 8 15
Units 100 200 300

What was the value of the closing inventory?

Task 2
In what circumstances might the fair value less further costs to sell of inventory be
lower than its cost?

Task 3
Storm, an entity, had 500 units of product X at 30 June 20X5. The product had
been purchased at a cost of $18 per unit and normally sells for $24 per unit.
Recently, product X started to deteriorate but can still be sold for $24 per unit,
provided that some rectification worl is undertaken at a cost of $3 per unit.
What was the value of closing inventory at 30 June 20X5?
Task 4
Hurricane, an entity, had 1,500 units of product Y at 30 June 20X8. The product
had been purchased at a cost of $30 per unit and normally sells for $40 per unit.
Recently, product Y started to deteriorate and can now be sold for only $38 per
unit, provided that some rectification work is undertaken at a cost of $10 per unit.
What was the value of inventory at 30 June 20X8?

Task 5
According to IAS 2 Inventories, the items that may be included in computing the
value of an inventory of finished goods manufactured by a business are clearly
specified.
Which one of the following lists consists only of items which may be included in
the statement of financial position value of such inventories according to IAS 2?
A) Foreman's wages, carriage inwards, carriage outwards, raw materials.
B) Raw materials, carriage inwards, costs of storage of finished goods, plant and machinery
costs.
C) Plant and machinery costs, carriage inwards, raw materials, foreman's wages.
D) Carriage outwards, raw materials, foreman's wages, plant and machinery costs.

Task 6

Invicta has closing inventory of 5 units at a cost of $3.50 per unit at 31 December
20X5.
During the first week of January 20X6, Invicta entered into the following
transactions:
Purchases%
2nd January - 5 units at $4.00 per unit
4th January - 5 units at $5.00 per unit
6th January - 5 units at $5.50 per unit
Invicta sold 7 units for $10.00 per unit on 5th January.

Required:
(a) Calculate the value of the closing inventory at the end of the first week of trading using
the following inventory valuation methods:
1) FIFO
2) periodic weighted average cost
3) continuous weighted average cost.
(b) Prepare the statement of profit or loss (sales revenue, cost of sales, gross profit)
for the first week of trading using each method of inventory valuation.

Solution
3) Inventory valuation - continuous AVCO
The best way to deal with this is to prepare a schedule dealing with transactions in
date order as follows:
Date Transaction Units Cost Total Cost
1 Jan X6 Op
inventory
2 Jan X6 Purchase

4 Jan X6 Purchase

5 Jan X6 Sale at cost

6 Jan X6 Purchase
7 Jan X6 Closing
inventory

b) Statements of profit or loss

Statement of profit or loss using the FIFO method

Revenue 
Opening inventory 
Purchases

Less: Closing inventory

Cost of sales 
Gross profit

Statement of profit or loss using the periodic AVCO method

Revenue 
Opening inventory 
Purchases
 Less: Closing inventory
Cost of sales 
Gross profit

Statement of profit or loss using the continuous AVCO method

Revenue 
Opening inventory 
Purchases

Less: Closing inventory

Cost of sales 
Gross profit

AVCO
Date Transaction Units Cost Total
Cost
1 Jan X6 Op 5 3,5 17,5
inventory
2 Jan X6 Purchase 5 4 20
10 (5*3,5+5*4)/(5+5)=3,75 37,5
4 Jan X6 Purchase 5 5 25
15 (10*3,75+5*5)/(10+5)=4,17 62,5
5 Jan X6 Sale at (7) 4,17 (29,19)
cost
8 33,31
6 Jan X6 Purchase 5 5,5 27,5
7 Jan X6 Closing 13 (33,31+5*5,5)/13=4,68 60,81
inventory

Task 7
A business commenced on 1 January and purchases are made as follows:

Month No of units Unit price, $ Total cost

$
Jan 380 2.00 760
Feb 400 2.50 1,000

Mar 350 2.50 875

Apr 420 2.75 1,155
May 430 3.00 1,290
 Jun 440 3.25 1,430
TOTAL 2 420 6,510

June, 1,420 articles were sold for $7, 000.

Required:
Calculate the cost of closing inventory and gross profit for the period using the
FIFO method.

Solution

Task 8
On 1 July 20X6 an entity, Pinto, had 10 items of inventory at a unit cost of $8.50.
Pinto then made the following purchases and sales during a six month period to 31
December 20X6:
Purchases:
 Date Quantity Unit price, $ Total cost
$
14 Oct X6 15 9.00 153.00
22 Nov X6 25 9.20 230.00
13 Dec X6 20 9.50 190.00
60 555.000

Sales:

Date Quantity Unit price, $ Total cost

$
23 Aug X6 7 12.00 84.00
20 Oct X6 10 12.25 122.5
30 Nov X6 15 12.50 187.5
24 Dec X6 18 13.00 234.00
50 628.00

Required:
Based upon the available information, calculate the closing inventory valuation at
31 December 20X6 using:
(a) periodic weighted average cost
(b) continuous weighted average cost.

Solution
(b) Continuous weighted average cost per unit

Date Quantity Unit price, $ Total cost

$
Gross profit 23 Aug = 84-59,5=24,5
Gross profit 20 Oct= 122,5-89,2=33,3
Gross profit 30 Nov= 187,5-136,95=50,55
Gross profit 24 Dec = 234-167,7=66,24
Total = 174,59
Task 9

The organization of the IT-sphere bought 10 monitors, worth $ 1000. When

purchasing 10 monitors, the buyer receives a monitor free of charge. A similar
printer from the supplier costs $20.
Required:
Determine the cost of your monitor and printer.
Task 10

The carrying amount of the company's inventories recorded at cost is $ 89 million

at September 30 2019. This amount includes the cost of defective components
worth $ 2.3 million. Management estimates that the company may modify these
components at a cost of $ 900,000 and then sell them. for $ 2.1 million

Required:
Based upon the available information, calculate the closing inventory valuation at
September 30 2019.

Task 11
The following costs relate to a unit of products: Cost of raw materials $1, Direct
labour $0.50 During the year $60,000 of production overheads were incurred.
8,000 units were produced during the year which is lower than the normal level of
10,000 units. This was as a result of a fault with some machinery which resulted in
2,000 units having to be scrapped. At the year-end, 700 units are in closing
inventory.

Required:
What is the value of closing inventory?

Task 12
Posh has the following units in inventory at the end of 20X9.

Units Cost per unit ($)

Raw materials 5,000 25
Work in progress (WIP) 2,000 30
Finished products 1,000 35

Finished items usually sell for $50 per unit.

However, water damage caused by improper storage of inventory will mean that
300 units of finished products will be sold at 60% of the normal selling price less
costs to sell of $5 per item. A further $5.50 per unit is still to be incurred to finish
off the items of work in progress.

Required:
In accordance with IAS 2 Inventories, at what amount should inventories be stated
in the statement of financial position of Posh plc as at the end of 20X9?
IAS 2 TEST
1. An item of inventory was purchased for $500. It is expected to be sold for $1,200
although $250 will need to be spent on it in order to achieve the sale. To replace the same
item of inventory would cost $650. At what value should this item of inventory be
included in the financial statements?

2. Closing inventory may be valued using first-in, first-out (FIFO) or average cost (AVCO).
Which of the following statements is true assuming that prices have fallen throughout the
year?
A) Closing inventory and profit are higher using FIFO rather than AVCO
B) Closing inventory and profit are lower using FIFO rather than AVCO
C) Closing inventory is higher and profit lower using FIFO rather than AVCO
D) Closing inventory is lower and profit higher using FIFO rather than AVCO

3. Appleby buys and sells inventory during the month of August as follows:
No. of units cost per unit
$

Opening inventory 100 2.52/unit

4 August Sales 20

8 August Purchases 140 2.56/unit

10 August Sales 90

18 August Purchases 200 2.78/unit

20 August Sales 180

Which of the following statements is true?

A) Closing inventory is $19.50 higher when using the FIFO method instead of the
periodic weighted average.
 B) Closing inventory is $19.50 lower when using the FIFO method instead of the
periodic weighted average.
C) Closing inventory is $17.50 higher when using the FIFO method instead of the
periodic weighted average.
D) Closing inventory is $17.50 lower when using the FIFO method instead of the
periodic weighted average.

4. David performs an inventory count on 30 December 20X6 ahead of the 31 December

year end. He counts 1,200 identical units, each of which cost $50. On 31 December,
David sold 20 of the units for $48 each.
What figure should be included in David's statement of financial position for inventory at
31 December 20X6?

5. Identify whether each of the following statements relating to the accounting treatment of
inventory and work in progress in financial statement is true or false.
 True False

Inventory should be valued at the lower of cost, net

realisable value and replacement cost

When valuing work in progress, materials costs, labour

costs and variable and fixed production overheads must
be included.

Inventory items can be valued using either first in, first

out (FIFO) or weighted average cost.

An entity's financial statements must disclose the

accounting policies used in measuring inventories.

6. Kiera's interior design business received a delivery of fabric on 29 June 20X6 and was
included in the inventory valuation at 30 June 20X6. As at 30 June 20X6, the invoice for
the fabric had not been accounted for.

Based upon the available information, what effect(s) will this have on Kiera's profit for
the year ended 30 June 20X6 and the inventory valuation at that date?
(1) Profit for the year ended 30 June 20X6 will be overstated.
(2) Inventory at 30 June 20X6 will be understated.
(3) Profit for the year ended 30 June 20X7 will be overstated.
(4) Inventory at 30 June 20X6 will be overstated.

A) (1) and (2)

B) (2) and (3)
 C) (1) only
D) (1) and (4)

7. A business had an opening inventory of $180,000 and a closing inventory of $220,000 in

its financial statements for the year ended 31 December 20X5.

Which of the following accounting entries are required to account for opening and
closing inventory when preparing the financial statements of the business?

Debit Credit

A Inventory account 180,000

Statement of P/L 180,000

Statement of P/L 220,000

Inventory account 220,000

B Statement of P/L 180,000

Inventory account 180,000

Inventory account 220,000

Statement of P/L 220,000

C Inventory account 40, 000

Purchases account 40, 000

D Purchases account 40, 000

Inventory account 40, 000

 8. Ajay's annual inventory count took place on 7 July 20X6. The inventory value on this
date was $38, 950. During the period from 30 June 20X6 to 7 July 20X6, the following
took place:
Sales - $6,500
Purchases- $4,250
The mark up is 25% on cost.
What is Ajay's inventory valuation at 30 June 20X6?

9. Inventory movements for product X during the last quarter were as follows:
Opening inventory at 1 January was 6 items valued at $15 each.
No. of units cost per unit
$

January Purchases 10 19.8

February Sales 10 30

March Purchases 20 24.5

Sales 5 30

What was gross profit for the quarter, if inventory is valued using the continuous
weighted average cost method?
10. Your firm values inventory using the periodic weighted average cost method. At 1
October 20X8, there were 60 units in inventory valued at $12 each. On 8 October, 40
units were purchased for $15 each, and a further 50 units were purchased for $18 each on
14 October. On 21 October, 75 units were sold for $1, 200.
What was the value of closing inventory at 31 October 20X8?
11. Percy Pilbeam is a book wholesaler. On each sale, commission of 4% is payable to the
selling agent. The following information is available in respect of total inventories of
three of his most popular titles at his financial year-end:
Cost, $ Selling price $

Henry VII - Shakespeare 2,280 2,900

Dissuasion - Jane Armstrong- 4,080 4,000

Siddeley

Pilgrim's Painful Progress - John 1,280 1,300

Bunion

What is the value of these inventories in Percy's statement of financial position?

A) $7,368
B) $7,400
C) $7,560
D) $7,640

12. An organisation's inventory at 1 July was 15 units at a cost of $3.00 each. The following
movements occur:
3 July 20X4 - 5 units sold at $3.30 each
8 July 20X4 - 10 units bought at $3.50 each
12 July 20X4 8 units sold at $4.00 each

What was the value of closing inventory at 31 July, if the FIFO method of inventory
valuation is used?
A) $31.50
B) $36.00
C) $39.00
D) $41.00
13. What would be the effect on an entity's profit for the year of discovering that inventory
with cost of $1,250 and a net realisable value of $1,000 had been omitted from the
original inventory valuation?

A) An increase of $1,250
B) An increase of $1,000
C) A decrease of $250
D) No effect at all

14. “S” Co sells three products - Basic, Super and Luxury. The following information was
available at the year-end:

Basic Super Luxury

$ per unit $ per unit $ per unit

Original cost 6 9 18

Estimated selling price 9 12 15

Selling and distribution costs 1 4 5

Units in inventory 200 units 250 units 150 units

What was the valuation of inventory at the year-end?

15. In times of rising prices, the valuation of inventory using the first in, first out method, as
opposed to the weighted average cost method, will result in which of the following
combinations?
Cost of sales Profit Closing inventory

A Lower Higher Higher

B Lower Higher Lower

C Higher Lower Higher

D Higher Higher Lower

16. If an entity uses the periodic weighted average cost method to value closing inventory,
which of the following statements is true?
A) Unit average cost is recalculated each time there is a purchase of inventory
B) Unit average cost is recalculated each time there is a sale of goods
C) Unit average cost is calculated once only at the end of an accounting period
D) Unit average cost is recalculated each time there is a purchase or a sale 1

17. If an entity uses the continuous weighted average cost method to value closing
inventory, which of the following statements is true?
A) Unit average cost is recalculated each time there is a purchase of inventory
B) Unit average cost is calculated once only at the end of an accounting period
C) Unit average cost is recalculated each time there is a sale of goods
D) Unit average cost is recalculated each time there is a purchase or a sale

18. If an entity uses the continuous weighted average cost method to value closing
inventory, what is the value of closing inventory based upon the following information?
2 Feb - Purchased - 10 units at a cost of $5.00 per unit
5 Feb - Sold - 6 units at a price of $8 per unit
7 Feb - Purchased -10 units at a cost of $6.50 per unit

19. If an entity uses the periodic weighted average cost method to value closing inventory,
what is the value of closing inventory based upon the following information?
12 Apr - Purchased - 10 units at a cost of $5.00 per unit
15 Apr - Sold - 6 units at a price of $8 per unit
17 Apr - Purchased -10 units at a cost of $6.50 per unit
20. Using the periodic weighted average cost method to value closing inventory, what is the
value of cost of sales for April based upon the following information?
1 Apr Opening inventory - 4 units at a cost of $4.00 per unit
12 Apr - Purchased - 10 units at a cost of $5.00 per unit
15 Apr - Sold - 6 units at a price of $8 per unit
17 Apr - Purchased - 10 units at a cost of $6.00 per unit
25 Apr - Sold - 8 units at a price of $8.50 per unit

21. Using the continuous weighted average cost method to value closing inventory, what is
the value of cost of sales for April based upon the following information?
1 Apr - Opening inventory - 4 units at a cost of $4.00 per unit
12 Apr - Purchased - 10 units at a cost of $5.00 per unit
15 Apr - Sold -6 units at a price of $8 per unit
17 Apr - Purchased - 10 units at a cost of $6.00 per unit
25 Apr- Sold - 8 units at a price of $8.50 per unit
IAS 37 TASKS

Task 1

Which of the following would require a provision for a liability to be created by BW at its
reporting date of 31 October 20X5?
A) The government introduced new laws on data protection which come into force on 1
January 20X6. BW's directors have agreed that this will require a large number of staff to
be retrained. At 31 October 20X5, the directors were waiting on a report they had
commissioned that would identify the actual training requirements.
B) At the year-end BW is negotiating with its insurance provider about an outstanding
insurance claim. On 20 November 20X5, the provider agreed to pay $200, 000.
C) BW makes refunds to customers for any goods returned within 30 days of sale, and has
done so for many years.
D) A customer is suing BW for damages alleged to have been caused by BW's product. BW
is contesting the claim and at 31 October 20X5 the directors have been advised by BW's
legal advisers that it is very unlikely to lose the case.

Task 2
Target is preparing its financial statements for the year ended 30 September 20X7. Target is
facing a number of legal claims from its customers with regards to a faulty product sold. The
total amount being claimed is $3.5 million. Target's lawyers say that the customers have an 80%
chance of being successful.

Required:
According to IAS 37 Provisions, Contingent Liabilities and Contingent Assets, what amount, if
any, should be recognised in respect of the above in Target's statement of financial position as at
30 September 20X7?

Answer $3,500,000Per IAS 37, the amount payable relates to a past event (thesale of faulty
products) and the likelihood of payout isprobable (i.e. more likely than not). Hence, the full amount
ofthe payout should be provided for.

Task 3
ABC has a year end of 31 December 20X4. On 15 December 20X4 the directors publicly
announced their decision to close an operating unit and make a number of employees redundant.
Some of the employees currently working in the unit will be transferred to other operating units
within ABC.
The estimated costs of the closure are as follows:
Redundancy costs $ 800
Lease termination costs $ 200
Relocation of continuing employees to new locations $ 400
Retraining of continuing employees $ 300
1,700
Required:
What is the closure provision that should be recognised?

800+200=1000

Task 4
On 1 October 20X3, Xplorer commenced drilling for oil in an undersea oilfield. The extraction
of oil causes damage to the seabed which has a restorative cost (ignore discounting) of $10,000
per million barrels of oil extracted. Xplorer extracted 250 million barrels of oil in the year ended
30 September 20X4. Xplorer is also required to dismantle the drilling equipment at the end of its
five-year licence. This has an estimated cost of $30 million on 30 September 20X8. Xplorer's
cost of capital is 8% per annum and $1 has a present value of 68 cents in five years' time

Required:
What is the total provision (extraction plus dismantling) which Xplorer would report in its
statement of financial position as at 30 September 20X4 in respect of its oil operations?
134

The following scenario relates to TASKS 5-9

On 7 January 20X5, Hermione was informed that it was being sued by an employee in respect of
a workplace accident that took place in October 20X4. Legal advisors advise that Hermione is
certain to lose the case. They have provided the following information:
Estimated pay-out Probability of payment occurring
$1 million 30%
$2 million 60%
$3 million 10%
Hermione has sold 100,000 machines that are covered by a warranty agreement as at 31
December 20X4. If a machine develops a major fault then the average cost to Hermione of
repairing it is $100. If a machine develops a minor fault then the average cost to Hermione of
repairing it is $30. It is believed that 6% of the machines under warranty will develop major
faults and that 8% will develop minor faults. The time value of money can be ignored.
On 15 December 20X4, the directors of Hermione decided to restructure the business and created
a detailed and formal plan. On that date, an announcement was made to the employees who were
informed that they would be made redundant in March 20X5. The directors estimate that the
restructuring exercise will involve the following costs:
Type of cost $m
Redundancy payments 1.2
Staff relocation 0.8
Investment in new systems 2.0

Task 5
Which of the following are outlined in IAS 37 Provisions, Contingent Liabilities and Contingent
Assets as criteria required for recognising a provision?

(i) An entity has a present obligation from a past event.

(ii) It is possible that an outflow of resources will be required.
(iii) A reliable estimate can be made of the amount of the obligation.

A) (i), (ii) and (iii)

B) (i) and (ii) only
C) (i) and (iii) only
D) (ii) and (iii) only

Task 6

Required:
What amount should be recognised as a provision in respect of the workplace accident claim in
the year ended 31 December 20X4?
Task 7

Required:
What amount should be recognised as a warranty provision in the year ended 31 December
20X4?

Answer $840,000The provision being measured involves a large population ofitems, so an expected
value must be calculated:(100,000 x 6% x $l00) + (100,000 x 8% x $30) = $840,000

Task 8

Required:
What amount should be recognised as a restructuring provision in the year ended 31 December
20X4?

Task 9

The following situations have arisen in the year ended 31 December 20X4:

Situation 1: A law was introduced in November 20X4 requiring Hermione to fit new smoke
filters in its factory by February 20X5 at an estimated cost of $500, 000. By the reporting date,
Hermione had not fitted the smoke filters.

Situation 2: The management accountant of Hermione has reliably forecast an operating loss of
$4 million for the year ended 31 December 20X5.

Required:

Which, if any, of the situations require a provision to be recognised?

 Provision No provision
Situation 1
Situation 2

IAS 37 TEST
1. For which of the following items is a provision required in accordance with IAS 37
Provisions, Contingent Liabilities and Contingent Assets?

Provision required Provision not

required
A retail outlet has a policy of providing
refunds over and above the statutory
requirement to do so. This policy is well
publicised and customers have made use of
this facility in the past.
A customer has made a legal claim against an
entity, claiming that faulty goods sold to them
caused damage to their property. The entity's
lawyers have advised that the claim will
possibly succeed and, if it does, compensation
of $10,000 will be payable.
2. Which of the following statements about the requirements relating to IAS 37
Provisions, Contingent Liabilities and Contingent Assets are correct?

(1) A contingent asset should be disclosed by note if an inflow of economic benefits is

probable.
(2) No disclosure of a contingent liability is required if the possibility of a transfer of
economic benefits arising is remote.
(3) Contingent assets must not be recognised in financial statements unless an inflow of
economic benefits is virtually certain to arise.

A) (1), (2) and (3)

B) (1) and (2) only
C) (1) and (3) only
D) (2) and (3) only

3. The following items need to be considered in finalising the financial statements of Q Co:
(1) Q Co gives warranties on its products. Q Co's statistics show that about 5% of sales
give rise to a warranty claim.
(2) Q Co has guaranteed the overdraft of another entity. The likelihood of a liability
arising under the guarantee is assessed as possible.

What is the correct action to be taken in the financial statements of Q Co for these
items?
Create a provision Disclose by note only No action
A (1) (2)
B (1) (2)
C (1) and (2)
 D (1) and (2)

4. Which the following statements relating to the requirements of IAS 37 Provisions,

Contingent Liabilities and Contingent Assets is correct?
A) A contingent asset must always be recognised and accounted for in the financial
statements.
B) A contingent asset must always be disclosed in the notes to the financial statements.
C) A contingent liability must always be disclosed in the not s to the financial statements if
it is regarded as possible.
D) A contingent liability must always be disclosed in the notes to the financial statements if
it is regarded as probable.
5. Which the following statements relate the requirements of IAS 37 Provisions,
Contingent Liabilities and Contingent Assets is correct?
A) A contingent asset must be recognised and accounted for in the financial statements
if it is regarded as probable.
B) A contingent asset must never be recognised in the financial statements.
C) A contingent liability must either be recognised and accounted for in the financial
statements, or disclosed in the notes to the financial statements.
D) A contingent liability may not be required to be accounted for or disclosed in the
notes to the financial statements under certain circumstances.

6. Which of the following statements are correct in relation to provisions and

liabilities?
(1) A provision will always be classified as falling due for payment within twelve months
of of the reporting date, whereas a liability may be classified as either current or non-
current.
(2) A provision requires judgement and estimation to quantify the amount and/or the date
of payment, whereas a liability is normally capable of precise calculation and the date of
payment can be determined.
(3) A provision meets the definition of a liability, but is subject to uncertainty regarding
the exact amount or date of the future outflow of economic benefits.
 A) (1) and (2)
B) (2) and (3)
C) (1) and (3)
D) (1), (2) and (3)

7. Driller Co undertakes oil and gas exploration activities. One of the conditions of the
operating licence is that Driller must make good any damage caused to the local
environment as a result of its exploration activities. As at the year-end date of 31 August
20X4, Driller Co estimated that the cost of rectifying damage already caused at current
exploration sites at $5 million. At that date Driller Co estimated that that the cost of
rectifying expected future damage at current exploration sites at an additional $20
million. Driller Co also estimated that all current exploration sites will operate until 20X7
or beyond that date.

How should this information be reported in the financial statements of Driller Co

for the year ended 31 August 20X4?
A) As a provision classified as a current liability for $5 million
B) As a provision classified as a current liability for $25 million
C) As a provision classified as a non-current liability for $5 million
D) As a provision classified as a non-current liability for $25 million
8. Recently, users of a new perfume have suffered blistering of the skin along with
considerable pain and discomfort. Following investigation by the manufacturer, Fleur Co,
it appears that product contamination occurred during the bottling process which was
performed by Bottler. Fleur Co's legal representatives have advised it that it is probable
that customers will make valid compensation claims totalling $3 million and that it is
probable Fleur Co will be able to successfully counter-claim against Bottler for the same
amount.

How should this information be reported in the financial statements of Fleur Co for
the year ended 31 August 20X4?
A) There should be a provision for $3 million only recognised in the statement of
financial position.
B) There should be a provision and an asset, each for $3 million, recognised in the
statement of financial position.
C) No provision or asset should be recognised in the statement of financial position as
the two amounts cancel each other.
D) There should be a provision for $3 million in the statement of financial position and a
disclosure note only to deal with the contingent asset of the amount which may be
recovered from Bottler.
9. Electrode manufactures vacuum cleaners and allows customers three months from the
date of purchase to return cleaners if they are dissatisfied with the product for any reason.
At 31 May 20X8, Electrode included a provision of $10,000 in the financial statements
relating to the expected return of cleaners which had been sold before the year-end date.
At 31 May 20X9, Electrode estimated that the amount of the provision should be changed
to $13, 000.

How should this information be accounted for in the financial statements for the
year ended 31 May 20X9?
Dr Cr
A Other comprehensive income $3,000 Provision $3,000
B Provision $3,000 Other comprehensive income $3,000
C Profit or loss $3,000 Provision $3,000
D Provision $3,000 Profit or loss $3,000

10. During the year ended 30 April 20X7 Doolittle experienced a number of difficulties with
employees. On 1 April 20X7 Doolittle dismissed an employee and subsequently received
notice of a claim for unfair dismissal amounting to $50, 000. Another employee suffered
personal injury on 30 March 20X7 whilst operating machinery at work. On 30 May
Doolittle received notice of a claim from that employee for compensation of $100, 000.
Doolittle's legal representatives have advised that the claim for unfair dismissal will
probably be successful and result in a compensation award of $50,000 to the employee.
They also advised that the compensation claim for injury suffered is regarded as possible,
but not probable, that compensation will be payable. In the event that compensation was
payable for personal injury suffered, an amount of $1000,000 is a reliable estimate.
How should this information be accounted for in the financial statements of
Doolittle for the year ended 30 April 20X7?
 A) A provision should be recognised in the financial statement for $50,000 only.
B) A provision should be recognised in the financial statements for $50,000 plus a
disclosure note included of the possible compensation payment relating to the
personal injury claim.
C) A provision should be recognised in the financial statements for $150,000 only.
D) A provision should be recognised in the financial statements for $150,000 and a
disclosure note included of the possible compensation payment relating to the
personal injury claim.

IAS 16, 40 TASKS

Task 1
An entity started construction on a building for its own use on 1 April 20X7 and
incurred the following costs:
Purchase price of land $ 250,000
Stamp duty $ 5,000
Legal fees $ 10,000
Site preparation and clearance $ 18,000
Materials $ 100,00
Labour (period 1 April 20X7 to 1 July 20X8) $ 150,000
Architect's fees $ 20,000
General overheads $ 30,000
TOTAL $ 583,000

The following information is also relevant:

 1) Material costs were greater than anticipated. On investigation, it was found
that materials costing $10 million had been spoiled and therefore wasted and
a further $15 million was incurred on materials as a result of faulty design
work.
2) As a result of these problems, work on the building ceased for a fortnight
during October 20X7 and it is estimated that approximately $9 million of the
labour costs relate to this period. The building was completed on 1 July
20X8 and occupied on 1 September 20X8.
Required: to calculate the cost of the building that will be included in tangible
non-current asset additions.

Task 2
Bilbo Baggins started a business providing limousine taxi services on 1 January
20X5.
In the year to 31 December he incurred the following costs:
250,000
Office premises
Legal fees associated with purchase of office 10,000
Cost of materials and labour to paint office in 300
Bilbo's favourite colour, purple
Mercedes E series estate cars 116,000
Number plates for cars 210
Delivery charge for cars 180
Road licence fee for cars 480
Drivers' wages for first year of operation 60,000
Blank taxi receipts printed with Bilbo Baggins' 450
business name and number

Required:
What amounts should be capitalised as 'Land and buildings' and 'Motor vehicles'?

Task 3
An entity purchased an asset for $20,000 on 1 January 20X3.
Straight- line depreciation, assuming a four-year useful life with no residual value.
On 1 January 20X5 the annual review of asset lives was undertaken and the
remaining useful life for this asset was estimated at four years.
The financial statements for the year ended 31 December 20X5 are being prepared.
Required:
What is the depreciation charge for the year ended 31 December 20X5? 

Task 4
Alfie purchased a non-current asset for $100,000 on 1 January 20X2 and started
depreciating it over five years. Residual value was taken as $10, 000. At 1 January
20X3 a review of asset lives was undertaken and the remaining useful life of the
asset was estimated at eight years. Residual value was estimated to be nil.
Required:
Calculate the depreciation charge for the year ended 31 December 20 20X3 and
subsequent years.
Task 5
An entity revalues its buildings and decides to incorporate the revaluation into its
financial statements.
Extract from the statement of financial position at
31 December 20X7:
Buildings
Cost $ 1,200
Depreciation $ (144)

The building is revalued at 1 January 20X8 at $1,400, 000.

Its useful life is 40 years at that date.

Required:
Show the relevant extracts from the financial statements at 31 December 20X8.
Task 6
The following information relates to Bangers & Smash, a car repair business:
Machine 1 Machine 2
Cost $12,000 $8,000
Purchase date 1 August 20X5 1 October 20X6
Depreciation method 20% straight line 10% reducing balance

20X5 20X6 A B C D $ $ 2,400 2,600 1,000 2,600 2,400 3,200 1,000 3,200
Required:
What is the total depreciation charge for the years ended 31 December 20X5 and
20X6?
Task 7
Coco acquired two non-current assets for cash on 1 August 20X5 for use in her
party organising business:
-a property with a 25-year useful life for $200,000 with no expected residual value
- a chocolate fountain for $4, 000.
The fountain is to be depreciated at 25% pa using the reducing balance method.

Required:
What is the total depreciation charge for these assets for the years ending 31
October 20X5, 20X6 and 20X7?
Task 8
Alberto bought a wood-burning oven for his pizza restaurant for $30,000 on 1
January 20X0. At that time he believed that the oven's useful life would be 20
years after which it would have no value. On 1 January 20X3, Alberto revises his
estimations: he now believes that he will use the oven in the business for another
12 years after which he will be able to sell it second-hand for $1, 500
Required:
What is the depreciation charge for the year ended 31 December 20X3?

Task 9
Derek purchased a property costing $750,000 on 1 January 20X4 with a useful life
of 10 years. It has no residual value. At 31 December 20X4 the property was
valued at $810,000 resulting in a gain on revaluation being recorded in other
comprehensive income of $135, 000. There was no change to its useful life. Derek
does not make a transfer to realised profits in respect of excess depreciation on
revalued assets. On 31 December 20X6 the property was sold for $900, 000.
Required:
Calculate the amount of profit or loss on disposal

Task 10
An entity purchased a property 15 years ago at a cost of $100,000 and have been
depreciating it at a rate of 2% per annum, on the straight line basis. The entity have
had the property professionally revalued at $500, 000.
Required:
What is the revaluation surplus that will be recorded in the financial statements in
respect of this property?

Task 11
On 1 April 20X0 Slow and Steady Co held non-current assets that cost $312,000
and had accumulated depreciation of $66,000 at this date. During the year ended
31 March 20X1, Slow and Steady Co disposed of non-current assets which had
originally cost $28,000 and had a carrying amount of $11, 200. Slow and Steady
Co's policy is to charge depreciation of 40% on the reducing balance basis, with no
depreciation charged in the year of disposal.
Required:
What is the depreciation charge to the statement of profit or loss for the year ended
31 March 20X1?

Task 12
Celine, a manufacturing entity, purchases a property for $1 million on 1 January
20X1 for its investment potential.
The land element of the cost is believed to be $400,000, and the buildings element
is expected to have a useful life of 50 years.
At 31 December 20X1, local property indices suggest that the fair value of the
property has risen to $1.1 million.

Required:
Show how the property would be presented in the financial statements as at 31
December 20X1 if Celine adopts:
(a) the cost model
(b) the fair value model. 

Task 13
Kyle Co purchased an investment property some year ago and carries it under the
fair value model. At 1 January 20X1, the property had a fair value in Kyle Co's
financial statements of $12 million. On 1 July 20X1 Kyle Co decided to move into
the property and use it for its own business. At this date the asset had a fair value
of $14 million and a remaining useful life of 14 years.
Required:
What amount should be recorded in Kyle Co's statement of profit or loss for the
year ended 31 December 20X1?
Task 14
MaxCo owns a fish finger factory. The premises were purchased on 1 January
20X1 for $450,000 and depreciation charged at 2% pa on a straight- line basis.
MaxCo now wishes to revalue the factory premises to $800,000 on 1 January 20X7
to reflect its market value.
Required:
What is the balance on the revaluation surplus account after accounting for this
transaction?

Solution:
PPE Factory
$ $

Accumulated depreciation
$ $

Revaluation surplus
$ $
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IAS 16, 40 part 2 TASKS

Task 1
On 1 January 20X7, Z Co purchased an item of plant. The invoice showed:
Cost of plant $ 48,000
Delivery to factory $ 400
One year warranty covering breakdown $ 800
49,200
Modifications to the factory building costing $2,200 were necessary to enable the
plant to be installed
Required:
What amount should be capitalised for the plant in Z Co's accounting records?
Task 2
A non-current asset was purchased at the beginning of Year 1 for $2,400 and
depreciated at 20% per annum using the reducing balance method. At the
beginning of Year 4 it was sold for $1, 200.
Required:
What was the profit or loss on disposal?
Task 3
A business' non-current assets had a carrying amount of $125, 000. An asset which
had cost $12,000 was sold for $9,000, at a profit of $2, 000.
Required:
What is the revised carrying amount of non-current assets?
Task 4
W Co bought a new printing machine from abroad. The cost of the machine was
$80, 000. The installation costs were $5,000 and the employees received training
on how to use the machine, at a cost of $2, 000. Before using the machine to print
customers' orders, pre- production safety testing was undertaken at a cost of $1,
000.
Required:
What should be the cost of the machine in W Co's statement of financial position?
Task 5
A non-current asset was disposed of for $2,200 during the last accounting year. It
had been purchased exactly three years earlier for $5,000, with a residual value of
$500, and had been depreciated on the reducing balance basis, at 20% per annum.
Required:
What was the profit or loss on disposal?
Task 6
At the end of its financial year, Tanner Co had the following non-current assets:
Land and buildings at cost Land and buildings: accumulated depreciation $10.4
million $0.12 million Tanner Co decided to revalue its land and buildings at the
year-end to $15 million.
Required:
What will be the value of the revaluation surplus if the revaluation is accounted
for?

Task 7
On 1 January 20X8, Wootton had a building in its books which cost $500,000 with
a carrying amount of $405, 000. On 1 July 20X8, the asset was valued at $600,000
and Wootton wishes to include that valuation in its books. Wootton's accounting
policy is to depreciate buildings at the rate of 2% on a straight-line basis.
Required:
What was depreciation charge included in the statement of profit or loss for the
year ended 31 December 20X8?
Task 8
A car was purchased by a newsagent business in May 20X1 as follows:
Cost - $ 10,000
Vehicle tax - 1 year - $150
Total - $ 10,150
The business adopted a date of 31 December as its year-end.
The car was traded in for a replacement vehicle in August 20X5 at an agreed value
of $5, 000.
It was depreciated at 25% per annum using the reducing-balance method, charging
a full year's depreciation in the year of purchase and none in the year of sale.
Required:
What was the profit or loss on disposal of the vehicle during the year ended
December 20X5?
Task 9
SSG bought a machine at a cost of $40,000 on 1 January 20X1. The machine had a
useful life of six years and a residual value of $10, 000. The machine was
depreciated using the straight-line basis on a monthly basis. At 31 December
20X4, the machine was sold for $15, 000.
Required:
What was the profit or loss on disposal for inclusion in the financial statements for
the year ended 31 December 20X4?

Task 10
Liza bought a guillotine for her framing business for $20,000 on 1 July 20X7. She
expected the guillotine to have a useful life of ten years and a residual value of
$500. On 1 July 20X8, Liza revised these estimates and now believes the guillotine
to have a remaining useful life of 5 years and no residual value.
Required:
What was the depreciation charge for the year ended 30 June 20X9?
Task 11
The following information of P Co is available for the year ended 31 October
20X2: Property Cost as at 1 November 20X1 Accumulated depreciation as at 1
November 20X1 $ 102,000 (20, 400) 81,600 On 1 November 20X1, P Co revalued
the property to $150, 000. P Co's accounting policy is to charge depreciation on a
straight-line basis over 50 years. On revaluation there was no change to the overall
useful life. It has also chosen not to make an annual transfer of the excess
depreciation on revaluation between the revaluation surplus and retained earnings.
Required:
What should be the balance on the revaluation surplus and the depreciation charge
as shown in P Co's financial statements for the year ended 31 October 20X2?
Task 12
A business has an accounting year end of 31 March. It purchased a truck on 1 April
20X3 at a total cost of $21,000, including $1,000 for one year of insurance cover.
At the date of purchase, the truck had an estimated useful life to the business of
eight years, and had an estimated residual value of $3, 000. The truck was traded in
for a replacement vehicle on 31 March 20X8 at an agreed valuation of $10, 000.
The truck was depreciated on a straight-line basis, with a pro-rated charge in the
year of acquisition and disposal.
Required:
Calculate the profit or loss on disposal of the truck.
Task 13
On 1 January 20X8, Barnstorm owned a building which cost $480,000 with a
carrying amount of $384, 000. On that date the building was valued at $600,000
and Barnstorm wishes to include that valuation in its financial statements.
Barnstorm's accounting policy is to depreciate buildings at the rate of 2% on a
straight-line basis and to make the annual transfer of'excess depreciation'.
Required:
What is the amount of the annual transfer of 'excess depreciation' that Barnstorm
will make as a result of the revaluation?
Task 14
The following information of Premium Co is available for the year ended 31
October 20X2: Property Cost as at 1 November 20X1 Accumulated depreciation as
at 1 November 20X1 102,000 (20, 400) 81,600 On 1 November 20X1, P Co
revalued the property to $120, 000. Premium Co's accounting policy is to charge
depreciation on a straight-line basis over 50 years. On revaluation there was no
change to the overall useful life. It has also chosen to make the annual transfer of
excess depreciation on revaluation in equity.
Required:
What should be the balance on the revaluation surplus and the depreciation charge
as shown in Premium Co's financial statements for the year ended 31 October
20X2?

New depreciation charge 120,000/40=3,000

IAS 36 40 TEST
1. IAS 16 Property, Plant and Equipment requires an asset to be measured at cost on its
original recognition in the financial statements. EW used its own staff, assisted by
contractors when required, to construct a new warehouse for its own use.
Identify whether the costs listed below should be capitalised or expensed.

Capitalise Provision not

required
Clearance of the site prior to commencement
of construction
Professional surveyor fees for managing the
construction work
EW's own staff wages for time spent
working on construction
A proportion of EW's administration
costs, based on staff time spent

2. On 1 July 20X4, Experimenter opened a chemical reprocessing plant. The plant was due
to be active for five years until 30 June 20X9, when it would be decommissioned. At 1
July 20X4, the costs of decommissioning the plant were estimated to be $4 million in 5
years' time. Experimenter considers that a discount rate of 12% is appropriate for the
calculation of a present value, and the discount factor at 12% for five years is 0. 567.
What is the total charge to the statement of profit or loss in respect of the
decommissioning for the year ended 30 June 20X5?

A) $453,600
B) $725,760
C) $800,000
D) $2,268,000
3. An entity purchased property for $6 million on 1 July 20X3. The land element of the
purchase was $1 million. The expected life of the building was 50 years and its residual
value nil. On 30 June 20X5 the property was revalued to $7 million, of which the land
element was $1.24 million and the buildings $5.76 million. On 30 June 20X7, the
property was sold for $6.8 million.
What is the gain on disposal of the property that would be reported in the statement
of profit or loss for the year to 30 June 20X7?
A) Gain $40,000
B) Loss $200,000
C) Gain $1,000,000
D) Gain $1,240,000
4. A manufacturing entity receives a grant of $1m towards the purchase of a machine on 1
January 20X3. The grant will be repayable if the entity sells the asset within 4 years,
which it does not intend to do. The asset has a useful life of 5 years.
What is the deferred income liability balance at 30 June 20X3?

5. On 1 January 20X1 Sty received $1m from the local government on the condition that
they employ at least 100 staff each year for the next 4 years. Due to an economic
downturn and reduced consumer demand on 1 January 20X2, Sty no longer needed to
employ any more staff and the conditions of the grant required full repayment.
What should be recorded in the financial statements on 1 January 20X2?
A) Reduce deferred income balance by $750,000
B) Reduce deferred income by $750,000 and recognise a loss of $250,000
C) Reduce deferred income by $1,000,000
D) Reduce deferred income by $1,000,000 and recognise a gain of $250,000
6. Which of the following properties owned by Scoop would be classified as an investment
property?
A) A property that had been leased to a tenant but which is no longer required and is now
being held for resale
B) Land purchased for its investment potential. Planning permission has not been obtained
for building construction of any kind
C) A new office building used as Scoop's head office, purchased specifically in order to
exploit its capital gains potential
D) A stately home used for executive training

7. During the current year an entity had in place $1 million of 6% loan finance and $2
million of 9% loan finance. It constructed a new factory which cost $600,000 and this
was funded out of the existing loan finance. The factory took 8 months to complete.
To the nearest thousand, what borrowing costs should be capitalised?
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8. Which of the following statements is correct?
Statement 1: If the revaluation model is used for property, plant and equipment,
revaluations must subsequently be made with sufficient regularity to ensure that the
carrying amount does not differ materially from the fair value at each reporting date.
Statement 2: When an item of property, plant and equipment is revalued, there is no
requirement that the entire class of assets to which the item belongs must be revalued.

9. Which TWO of the following items should be capitalised within the initial carrying
amount of an item of plant?
A) Cost of transporting the plant to the factory
B) Cost of installing a new power supply required to operate the plant
C) A deduction to reflect the estimated realisable value
D) Cost of a three-year maintenance agreement
E) Cost of a three-week training course for staff to operate the plant

10. Tibet acquired a new office building on 1 October 20X4. Its initial carrying amount
consisted of:
Land $ 2,000
Building structure $10,000
Air conditioning system $ 4,000
16,000
 The estimated lives of the building structure and air conditioning system are 25 years and
10 years respectively.
When the air conditioning system is due for replacement, it is estimated that the old
system will be dismantled and sold for $500, 000.
At what amount will the office building be shown in Tibet's statement of financial
position as at 31 March 20X5?
A) $15,625,000
B) $15,250,000
C) $15,585,000
D) $15,600,000

11. The following trial balance extract relates to a property which is owned by Veeton as at 1
April 20X4.
Property at cost (20 year original life) -$ 12,000
Accumulated depreciation as at 1 April 20X4 -$ (3,600)
On 1 October 20X4, following a sustained increase in property prices, Veeton revalued
its property to $10.8 million.
What will be the depreciation charge in Veeton's statement of profit or loss for the
year ended 31 March 20X5?