Accounting Services for Beacon Limited, Print First Ltd, and Sabr Ltd

Beacon Limited - Acquisition of Investment Property

Question 1 (Marks: 20)
Beacon Limited has approached you to provide accounting services to their company. On 1 July 2017 Beacon Limited acquired two Buildings. Building 12 South Road and Building 20 North Road. Building 12 South Road will be used as Beacon Limited’s head offices while Building 20 North Road has been purchased with the intention to lease out and earn rental income.
The building on 20 North Road, cost R1 700 000 to construct. Beacon also incurred the following
costs on 1 July 2017 – abnormal wastage costs of R50 000, transaction costs of R10 000 and legal costs of R120 000. This building is expected to have a useful life of 25 years. On 31 May 2018, a recognised independent valuer has assessed the fair value of this property to be R2 000 000.
The building on 12 South Road was purchased for R1 500 000. Beacon Limited depreciates buildings at 10% p.a. on the straight-line method. No residual value anticipated.

The accounting policy of Beacon Ltd is to measure investment property using the fair value model.
Q.1.1 Explain briefly why the Building on 20 North Road will be classified as an investment property. (1)
Q.1.2 Calculate the cost of the investment property to be recognised in the books of Beacon Ltd on 1 July 2017. (4)
Q.1.3 Prepare the journal entries to record all transactions relating to the capitalisation of both buildings in the books of Beacon Ltd for the year ended 31 May 2018. Narrations are required as marks will be allocated to these. (14)
Q.1.4 How would your answer to Q.1.3 above change if Beacon Ltd used the cost model to measure investment property?

Question 2 (Marks: 20)
Print First (Pty) Ltd is a printing company based in La Lucia. Print First (Pty) Ltd owns many industrial printing machines. One of these machines, Printex 350 was purchased on 1 January 2010 at a cost of R750 000. At that time, it was expected that Printex 350 would have a useful life of 20 years and a residual value of nil. Due to updates in technology in recent years, Print First customers require advanced printing techniques. This has resulted in a drastic decline in terms of Printex 350’s usage. On 1 January 2017, Print First management has revised the remaining useful life of Printex 350 to 4 years. At the same date, management calculated the following net cash inflows from Printex 350 for the next 3 years: A discount rate of 10% is applicable.

On 31 December 2017, the market selling price Printex 350 was R250 000. Estimated costs to sell would be R15 000.
Q.2.1 According to IAS36, when is an asset considered to be impaired? (2)
Q.2.2 Calculate the impairment loss that should be recognised by Print First Ltd on 31 December 2017. (15)
Q.2.3 Print First (Pty) has identified the impairment to Printex 350 as a material impairment loss. What information regarding the impairment should Print First (Pty) Ltd disclose in their financial statements? (3) 

The Independent Institute of Education 2018 The Independent Institute of Education (Pty) Ltd 2018 Page 4 of 4

Question 3 (Marks: 20)
Sabr Ltd is a company that manufactures drones. The financial year end is 30 June.

Software Sabr Ltd has a designated research and development team. The team performs research and development on a continuous basis to ensure that their products continue to satisfy their customer needs. In the last year, the research and development team have been developing new software called “System 360” to improve the functionality of the drones. In respect of this software, R160 000 has been capitalised in the previous financial year. Current year expenditure consists of:

Research salaries R 50 000
Development salaries R250 000
Staff training on new software R 28 500
The development was completed on 1 January 2017. Development costs are amortised on a straight-line basis at 15% per annum with no residual.

Other intangible assets
Sabr Ltd purchased the following assets on 1 March 2017:
Trademark Patent
Cost(R)      950 000 240 000
Useful life 20 years 15 years
Residual value(R) nil R100 000

Q.3.1 According to IAS38, when can development costs qualify for recognition as intangible assets? (5)
Q.3.2 Prepare the journal entry to record the amortisation on “System 360” as at 30 June 2017. Narrations are not required. (5)
Q.3.3 Prepare the intangible asset note to the annual financial statements of Sabr Ltd for the year ended 30 June 2017. Comparative figures are not required. Round all amounts to the nearest rand.