Zahra Manufacturing: revaluation, lease and warranty

Tick each point that your answer made clearly and only once. Points here are this site's own. A real examiner may accept other valid points.

• Carrying amount before revaluation: cost $2,000,000 less 4 years of depreciation at $50,000 a year = $1,800,000.
• Revaluation surplus = $2,400,000 - $1,800,000 = $600,000.
• The surplus is recognised in other comprehensive income and accumulated in the revaluation surplus in equity.
• Depreciation for 20X5 is based on the revalued amount over the remaining life: $2,400,000 / 36 = $66,667.
• Depreciation of $66,667 is higher than the $50,000 on the historical cost basis, because the revalued amount is higher.
• The excess depreciation can be transferred from the revaluation surplus to retained earnings each year (the transfer is $16,667).

Marks counted: 0 of 6

Tick each point that your answer made clearly and only once. Points here are this site's own. A real examiner may accept other valid points.

• Lease liability at 1 January 20X5 = $50,000 x 3.4651 = $173,255.
• The right-of-use asset is recognised at the same amount, $173,255 (no other costs or payments are given).
• Depreciation of the right-of-use asset = $173,255 / 4 = $43,314.
• Interest (finance cost) for 20X5 = 6% x $173,255 = $10,395.
• Lease liability at 31 December 20X5 = 173,255 + 10,395 - 50,000 = $133,651.
• The liability is split between current and non-current: the current part is the principal to be repaid next year.
• The payment of $50,000 is not an expense. It reduces the liability and is a financing cash flow (the interest element may be classified as interest paid).

Marks counted: 0 of 7

Tick each point that your answer made clearly and only once. Points here are this site's own. A real examiner may accept other valid points.

• A provision is needed if there is a present obligation from a past event, a probable outflow and a reliable estimate.
• The past event is the sale of the units with a warranty, which creates a legal obligation to repair defects.
• An outflow is probable for the population of warranties as a whole, based on past experience.
• The estimate can be made reliably using experience and an expected value, which is appropriate for a large population of similar items.
• Expected cost per unit = 7% x $100 + 3% x $500 = $7 + $15 = $22.
• Provision = 10,000 x $22 = $220,000.
• The expense is recognised in profit or loss when the units are sold, matching it with the revenue.
• A provision is not made for the 90 percent of units with no defects and there is no recognition of general future repair costs.

Marks counted: 0 of 7