Past exam Jun '15 Q3 – Section B

Precisely which part do you not understand?

Here is note (iii) to save you looking it up!

“Property, plant and equipment:
Included in property, plant and equipment are two major items of plant acquired on 1 April 2014:
Item 1 had a cash cost $14 million, however, the plant will cause environmental damage which will have to be rectified when it is dismantled at the end of its five year life. The present value (discounting at 8%) on 1 April 2014 of the rectification is $4 million. The environmental provision has been correctly accounted for, however, no finance cost has yet been charged on the provision.
Item 2 was plant acquired with a fair value of $8 million under a five-year finance lease. This required an initial deposit of $2·3 million and annual payments of $1·5 million on 31 March each year. The finance lease obligation in the trial balance above represents the fair value of the plant less both the deposit and the first annual payment. The lease has an implicit interest rate of 10% and the asset has been correctly capitalised in plant and equipment.
No depreciation has yet been charged on plant and equipment which should be charged to cost of sales on a straight-line basis over a five-year life (including leased plant). No plant is more than four years old.”

Well, there’s a lesson for you!

Make sure that you do the same in the exam!