Financial Reporting Questions for some IASs

Hi everyone! Could someone help to solve the questions below? I would like to check my calculations! They are arranged to different IASs. Thank you very much!

BACKGROUND

Pear Phone LLC (PP LLC), world-reputed manufacturer of mobile phones, is undergoing an extensive review before annual audit. You, Chief accountant of this Company, are requested to present summary of your calculations, journal entries and justifications for accounting treatment on issues mentioned by the internal consulting and control department. To ensure that your summary represents true and fair information, the internal consulting and control department will attract an external auditor with valuable industry experience. Before presenting your solutions to the board of directors, you need to go through numbers with external auditor.

PP LLC has been operating in Asian market since 2001. The production facilities, however, were built in Japan near the coast of Tohoku. The entity prepares the financial statements for each year as of 31 March according to International Accounting Standards.

ISSUES IDENTIFIED BY INTERNAL CONSULTING AND CONTROL DEPARTMENT

Revaluation, depreciation and impairment
PP LLC owns and controls few land and buildings, plants and equipment. On January 1, 2001, the entity bought land and necessary buildings for 1,500,000 USD all together. The cost of individual assets had 1:2 ratio. The plants with all necessary equipment were bought for 2,750,000 on the same date. At that time, the industry professional reviewed land and buildings, and plant and equipment, estimated that they have 20 and 25 years, respectively. In order to be consistent with economic life of assets, it was decided to use straight-line method to depreciate all available assets. The entity assumed that there would be no scrap value at that time.

However, due to financial crisis occurred in the second half of 2008, the management decided to change their estimates regarding depreciation policy, and they considered to apply revaluation model in order to be consistent with market. As of January 1, 2009, they had to downgrade the value all available assets by 40% of their original cost, and because chief economist expected an economic recovery in upcoming years, they estimated that the residual value for both land and buildings and plant and equipment would be 15% of the revalued amount once the impairment was recorded. The useful lives of assets remained unchanged

In September 2013, some small tsunami-driven waves hit three cities along the east coast. Due to small damages to the building, it was difficult to price the damage, hence the management decided to review the assets at the beginning of next accounting year. The management reviewed the useful life and estimated the buildings to have another 9 years left to operate at full potential, after which will be disposed at pre-specified price.

Required:
You need to prepare a summary, pointing out the following points, for the year-end March 31, 2018:
• Annual depreciation for individual assets
• Impairment loss or revaluation surplus of assets in relevant years
• Updated residual values, useful lives and annual depreciation charges in relevant years
• Journal entries for key changes.

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Intangible asset
PP LLC had $20 million of capitalised development expenditure at cost brought forward at January 1, 2007 in respect of products currently in production and a new project began on the same date.
The research stage of the new project lasted until March 31, 2007 and incurred 1.4 million USD of costs. From that date, the project incurred development costs of $800,000 per month. On July 1, 2008 the directors became confident that the project would be successful and yield a profit well in excess of costs. The project was still in development at December 31, 2008. Capitalised development expenditure is amortised at 20% per annum using the straight-line method.

Required:
What amount will be charged to profit or loss for the year ended January 30, 2008 in respect of research and development costs?

Borrowing cost
On 1 January 2016, PP LLC, raised funds, specifically to finance the construction of a new factory, a qualifying asset as per IAS 23, for $10,000,000 from a bank at interest rate of 8% per annum for 10 years. The entity commenced construction on 1 February 2016 and incurred expenditure of $3,500,000 at the first of each month from February to November 2016, except for September and October 2016, when the entity suspended the construction for two months due to labor strikes and shortage of materials. The building was completed and ready for use on 30 November 2016. The proceeds from specific borrowing were temporarily invested in March 2016 and generated interest income of $18,000.

Required:
Calculate the net borrowing cost that shall be capitalized as part of the cost of the new building and the net finance cost that shall be reported in the statement of profit or loss for the year ended 31 December 2016 (show journal entries).

Inventory – NRV
On 1 January 2017, PP LLC purchased 15,000 tons of raw material and recorded inventory at 10,000 USD cost per ton, which included deferral of payment to supplier for three months for an additional charge of 10,000,000 USD and 50,000,000 USD import taxes, 20,000,000 USD bonus to CEO for best price attained, and 15,000,000 USD transportation costs. Average selling cost of inventory remained 1,500 USD per ton throughout the year.

Additional information:
Dates Remaining balance (in units) Selling price (in $)
01.01.2017 15,000 12,500
31.03.2017 12,000 10,500
30.06.2017 9,000 8,500
30.09.2017 6,000 9,500
31.12.2017 3,000 6,500

Required:
Compute the closing inventory on each date shown in the above table and respective gains and losses from fluctuations in NRV.

Provisions
PP LLC provides warranties at the point of sale to its buyers. In relation to the warranties, the manufacturer promises to repair or replace defects that become apparent within three years from the date of sale. Drawing on past experience, the manufacturer expects that 65% of goods sold require repair that costs 10% of sale price; 25% of goods sold require repair that costs 35% of sale price; and remaining 10% of goods sold require repair or replacement costing 100% of sale price. Besides, PP LLC anticipates that expenditures for warranties for goods sold in 2017 are going to be incurred 45% in 2018, 35% in 2019, and 20% in 2020 (at the end of year in each period). Discount rate is 7.50% per annum.
In 2017, the Company sold 1,000,000 units of Phone A with cost of 560,000,000 USD at 20% gross profit and 3,000,000 units of Phone B with cost of 500,000,000 USD at 15% markup.

Required:
Determine the amount of warranty obligation that the manufacturer shall recognize for year 2017.

Financial Instruments
PP LLC issued at 10% three-year convertible bond (CB) at par worth 5,000,000 USD with 7% coupon. The terms of the convertible bond is that the holder of the bond, on the redemption date, has the option to convert the bond to equity shares at the rate of 100 shares with a nominal value of 2 USD per 100 USD debt rather than being repaid in cash. PP LLC accounted for the financial liability arising using amortized cost. The holder of the bond converted the liability into stocks at maturity.

Required:
Show relevant calculations/journal entries (initial recognition, subsequent measurement and conversion).

Lease
PP LLC leased equipment with fair value of the vehicle was 140,000 USD. The lease agreement contained the following:

Lease term 4 years
Annual payment, payable in advance on 30 June each year 40,000 USD
Economic life of vehicle 5 years
Estimated residual value at the end of lease term 8,000 USD

The lease is cancellable, but cancellation will incur a monetary penalty equivalent to 2 years of rental payments.
The lessor incurred 1,500 USD to initiate the lease to PP LLC.
Included in the annual payment is an amount of 2,500 USD to cover reimbursement for the costs of insurance and maintenance paid by the lessor.
PP LLC has no intention to keep the property at the end of the lease term and guaranteed to return the property with residual value of $7,500.

Required:
1. Determine whether the lease is an operating or finance lease per IAS 17.
2. Calculate value at initial recognition for both lessor and lessee and show related journal entries.