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Practical caseIAS 16L4 · Expert

Flood, compensation and disposal of a production line

5 documents12 tasks≈ 75 min
0 / 17 items completed
Standards
IAS 16 — Property, Plant and Equipment
Assistance levelFree workspace · autonomous situation
  • Method: withdrawn
  • Checklist: withdrawn
  • Hints: withdrawn
  • Step-by-step work: withdrawn

Case brief

Situation

Conserveries du Littoral (a fictitious company) has a 31 December reporting date and applies the cost model. Its packaging line No. 1, acquired on 1 January 20X0 for 1,200,000 and depreciated on a straight-line basis over 10 years with no residual value, is flooded on 30 September 20X2. It remains idle until it is sold in 20X3. The file handed to you contains documents of varying nature and reliability; management expects a professional memo on the treatment for 20X2 and 20X3.

Your assignment

The file is deliberately incomplete and contains items with no accounting effect. Identify the events, the applicable standards, the missing information and the assumptions to document, then determine the amounts, entries and impacts for 20X2 and 20X3. Justify each position.

Work on this file as you would in practice: read the situation, open the documents, sort the useful information, then carry out the work requested. The solution is revealed once you submit.

Autonomous professional situation

As on a real engagement: no method, no checklist and no hints. You identify the issues yourself, organise the work and defend your conclusion.

  • Organise the work
  • Document each point
  • Argue the conclusion

Events

Chronology of the file

  1. December 20 20X2Date the condition is met · Dated fact of the file

    Document 3

  2. February 28 20X3Contract signature date · Dated fact of the file

    Document 4

  3. March 31 20X3Date control is transferred · Dated fact of the file

    Document 4

Documents

File documents

5 documents: open each one to read it.

Document 1Extract

Fixed asset record of line No. 1

Cost: 1,200,000 (1 January 20X0). Useful life: 10 years. Residual value: nil. Annual charge: 120,000. Accumulated depreciation at 31 December 20X1: 240,000.

Data

Key data from the documents

The figures of the documents, gathered for your work.

ItemValueFound in
Cost of the line€1,200,000.00
Annual charge€120,000.00
Accumulated depreciation at 31 December 20X1€240,000.00
Fair value less costs of disposal€280,000.00
Remaining useful life7 years
Agent's oral estimate€450,000.00
Compensation accepted by the insurer€400,000.00
Date the condition is metDecember 20 20X2
Sale price€290,000.00
Dismantling cost borne by the seller€5,000.00
Date control is transferredMarch 31 20X3
Contract signature dateFebruary 28 20X3
Price of the replacement line€1,500,000.00

Sorting the information

Not every document matters: identify those that affect the accounting treatment.

Part 1 · Classification · Analysis

Sort each document: does it affect the accounting treatment?

Drag each item into its category, or tap the category under the item.

To sort5

  • Fixed asset record of line No. 1

  • Expert appraisal at 31 December 20X2

  • Correspondence with the insurer

  • Board minutes and sale contract

  • Purchase order for a replacement line

Relevant to the treatment0

    No effect0

      Workspace

      Work programme

      Organise your work freely: deal with each point, then argue your conclusion.

      1. Task 1Analysis

        Identify the events of 20X2 and 20X3 and, for each, the applicable rule.

      2. Task 2Professional judgement

        Should the idle line still be depreciated in 20X2 and 20X3? What assumption do you make about IFRS 5?

      3. Task 3Calculation

        Calculate the carrying amount before the test and the impairment loss at 31 December 20X2.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Calculate the carrying amount before the test and the impairment loss at 31 December 20X2.

        1. €
        2. €

        Checks

        • 0 / 2 steps entered
        • Amounts readable

        Result: Impairment loss for 20X2

      4. Task 4Professional judgement

        When and at what amount is the insurance compensation recognised? Can it reduce the cost of the replacement line?

      5. Task 5Journal entries

        What journal entries do you record at 31 December 20X2 in respect of the flood?

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Journal entry · Journal entries

        Entry 1 of 2

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

        Calculator

        Click in an answer field to be able to insert the result.

        Part 2 · Journal entry · Journal entries

        Entry 2 of 2

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

      6. Task 6Effects on the financial statements

        What is the impact of these entries on the 20X2 financial statements?

        Part 1 · Classification · Analysis

        State the direction of the effect on each financial statement aggregate.

        1. Financial position (balance sheet)

        2. Profit or loss

        3. Other comprehensive income

        4. Equity

        5. Notes

        Calculator

        Click in an answer field to be able to insert the result.

        Part 2 · Calculation · Analysis

        Quantify the effect on the aggregates concerned.

        1. €
        2. €
        3. €

        Checks

        • 0 / 3 steps entered
        • Amounts readable

        Result: Amount of the effect — Equity

      7. Task 7Professional judgement

        On what date is the line derecognised: board decision, contract signature or transfer of control?

      8. Task 8Calculation

        Calculate the revised annual charge after the impairment and the 20X3 charge up to derecognition.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Calculate the revised annual charge after the impairment and the 20X3 charge up to derecognition.

        1. €
        2. €

        Checks

        • 0 / 2 steps entered
        • Amounts readable

        Result: 20X3 charge up to 31 March

      9. Task 9Calculation

        Calculate the carrying amount at the derecognition date, the net proceeds and the gain or loss on disposal.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Calculate the carrying amount at the derecognition date, the net proceeds and the gain or loss on disposal.

        1. €
        2. €
        3. €
        4. €

        Checks

        • 0 / 4 steps entered
        • Amounts readable

        Result: Gain on disposal

      10. Task 10Journal entries

        What journal entries do you record in 20X3 up to the derecognition of the line?

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Journal entry · Journal entries

        Entry 1 of 2

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

        Calculator

        Click in an answer field to be able to insert the result.

        Part 2 · Journal entry · Journal entries

        Entry 2 of 2

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        3. Line 3

        4. Line 4

        5. Line 5

        TotalsDebit0Credit0

      11. Task 11Effects on the financial statements

        What is the impact of these entries on the 20X3 financial statements?

        Part 1 · Classification · Analysis

        State the direction of the effect on each financial statement aggregate.

        1. Financial position (balance sheet)

        2. Profit or loss

        3. Other comprehensive income

        4. Equity

        5. Notes

        Calculator

        Click in an answer field to be able to insert the result.

        Part 2 · Calculation · Analysis

        Quantify the effect on the aggregates concerned.

        1. €
        2. €
        3. €

        Checks

        • 0 / 3 steps entered
        • Amounts readable

        Result: Amount of the effect — Equity

      12. Task 12Conclusion

        Write the position memo for management, with the assumptions to be approved.

      Your working draft for this file: points noted, leads, intermediate calculations.

      Saved on this device only; never graded.

      Conclusion

      Submission and solution

      Complete every item of the file to submit it (0 / 17).

      Document this file

      These working papers use the data and results of this case.

      Normative references

      • IAS 16 §55
      • IAS 16 §63
      • IAS 16 §65
      • IAS 16 §66
      • IAS 16 §67
      • IAS 16 §68
      • IAS 16 §69
      • IAS 16 §71