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21. Dempsey Co owns a pharmaceutical business with a year‐end of 30 September 20X4. Dempsey Co commenced the development stage of a new drug on 1 January 20X4. $40,000 per month was incurred until the project was completed on 30 June 20X4, when the drug went into immediate production. The directors became confident of the project’s success on 1 March 20X4. The drug has an estimated life span of five years and time‐apportionment is used by Dempsey where applicable. What amount will Dempsey charge to profit or loss for development costs, including any amortisation, for the year ended 30 September 20X4? A $12,000 B $98,667 C $48,000 D $88,000 22. Which TWO of the following events which occur after the reporting date of an entity but before the financial statements are authorised for issue are classified as ADJUSTING events in accordance with IAS 10 Events after the Reporting Period? A A change in tax rate announced after the reporting date, but affecting the current tax liability B The discovery of a fraud which had occurred during the year C The determination of the sale proceeds of an item of plant sold before the year end D The destruction of a factory by fire 23 A division of an entity has the following balances in its financial statements: Particulars $ Goodwill 700,000 Plant 950,000 Building 2,300,000 Intangibles 800,000 Other net assets 430,000 Following a period of losses, the recoverable amount of the division is deemed to be $4 million. A recent valuation of the building showed that the building has a market value of $2.5 million. The other net assets are at their recoverable amount. The entity uses the cost model for valuing building and plant. To the nearest thousand, what is the balance on the building following the impairment review? A $2,300,000 B $2,500,000 C $2,027,000 D $1,776,000 give me the correct options

Question

  1. Dempsey Co owns a pharmaceutical business with a year‐end of 30 September 20X4. Dempsey Co commenced the development stage of a new drug on 1 January 20X4. 40,000permonthwasincurreduntiltheprojectwascompletedon30June20X4,whenthedrugwentintoimmediateproduction.Thedirectorsbecameconfidentoftheproject’ssuccesson1March20X4.Thedrughasanestimatedlifespanoffiveyearsandtime‐apportionmentisusedbyDempseywhereapplicable.WhatamountwillDempseychargetoprofitorlossfordevelopmentcosts,includinganyamortisation,fortheyearended30September20X4?A40,000 per month was incurred until the project was completed on 30 June 20X4, when the drug went into immediate production. The directors became confident of the project’s success on 1 March 20X4. The drug has an estimated life span of five years and time‐apportionment is used by Dempsey where applicable. What amount will Dempsey charge to profit or loss for development costs, including any amortisation, for the year ended 30 September 20X4? A 12,000 B 98,667C98,667 C 48,000 D $88,000
  2. Which TWO of the following events which occur after the reporting date of an entity but before the financial statements are authorised for issue are classified as ADJUSTING events in accordance with IAS 10 Events after the Reporting Period? A A change in tax rate announced after the reporting date, but affecting the current tax liability B The discovery of a fraud which had occurred during the year C The determination of the sale proceeds of an item of plant sold before the year end D The destruction of a factory by fire 23 A division of an entity has the following balances in its financial statements: Particulars Goodwill700,000Plant950,000Building2,300,000Intangibles800,000Othernetassets430,000Followingaperiodoflosses,therecoverableamountofthedivisionisdeemedtobe Goodwill 700,000 Plant 950,000 Building 2,300,000 Intangibles 800,000 Other net assets 430,000 Following a period of losses, the recoverable amount of the division is deemed to be 4 million. A recent valuation of the building showed that the building has a market value of 2.5million.Theothernetassetsareattheirrecoverableamount.Theentityusesthecostmodelforvaluingbuildingandplant.Tothenearestthousand,whatisthebalanceonthebuildingfollowingtheimpairmentreview?A2.5 million. The other net assets are at their recoverable amount. The entity uses the cost model for valuing building and plant. To the nearest thousand, what is the balance on the building following the impairment review? A 2,300,000 B 2,500,000C2,500,000 C 2,027,000 D $1,776,000 give me the correct options
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Solution

  1. The correct answer is D 88,000.Here′swhy:Thedevelopmentcoststhatcanbecapitalizedarethoseincurredafterthedatewhentheprojectisconsideredlikelytobesuccessful.Thisdateis1March20X4.So,thecostsfromMarchtoJune(4months)canbecapitalized,whichis88,000. Here's why: The development costs that can be capitalized are those incurred after the date when the project is considered likely to be successful. This date is 1 March 20X4. So, the costs from March to June (4 months) can be capitalized, which is 40,000 * 4 = 160,000.Thedrughasalifespanof5years,sotheamortizationforthe7monthsfromMarchtoSeptemberis160,000. The drug has a lifespan of 5 years, so the amortization for the 7 months from March to September is 160,000 * (7/60) = 18,667.Therefore,thetotalchargetoprofitorlossistheamortizationplusthecoststhatcannotbecapitalized(thosefromJanuaryandFebruary),whichis18,667. Therefore, the total charge to profit or loss is the amortization plus the costs that cannot be capitalized (those from January and February), which is 18,667 + 80,000=80,000 = 98,667. However, the question asks for the amount excluding amortization, so the answer is 98,667−98,667 - 18,667 = $80,000.

  2. The correct answers are B and C. According to IAS 10, adjusting events are those that provide evidence of conditions that existed at the end of the reporting period. The discovery of a fraud that occurred during the year (B) and the determination of the sale proceeds of an item of plant sold before the year end (C) both provide evidence of conditions that existed at the end of the reporting period.

  3. The correct answer is D 1,776,000.Here′swhy:Therecoverableamountofthedivisionis1,776,000. Here's why: The recoverable amount of the division is 4 million, which is less than the carrying amount of 5,180,000(5,180,000 (700,000 + 950,000+950,000 + 2,300,000 + 800,000+800,000 + 430,000). The impairment loss is therefore 1,180,000(1,180,000 (5,180,000 - 4,000,000).AccordingtoIAS36,theimpairmentlossisallocatedtoreducethecarryingamountoftheassetsoftheunit,withthereductionappliedfirsttogoodwill,thentotheotherassetsprorataonthebasisofthecarryingamountofeachasset.Thecarryingamountofthebuildingaftertheimpairmentreviewistherefore4,000,000). According to IAS 36, the impairment loss is allocated to reduce the carrying amount of the assets of the unit, with the reduction applied first to goodwill, then to the other assets pro rata on the basis of the carrying amount of each asset. The carrying amount of the building after the impairment review is therefore 2,300,000 - (1,180,000−1,180,000 - 700,000) * (2,300,000/2,300,000 / 4,480,000) = $1,776,000.

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