FRF7
Syllabus B. ACCOUNTING FOR TRANSACTIONS IN FINANCIAL STATEMENTS B1. Tangible non-current assets

B1cd. PPE - After Initial recognition 4 / 7

MC Question 17 - Specimen

Telepath Co has a year end of 30 September and owns an item of plant which it uses to produce and package pharmaceuticals. The plant cost $750,000 on 1 October 20X0 and, at that date, had an estimated useful life of five years.

A review of the plant on 1 April 20X3 concluded that the plant would last for a further three and a half years and that its fair value was $560,000.

Telepath Co adopts the policy of revaluing its non-current assets to their fair value but does not make an annual transfer from the revaluation surplus to retained earnings to represent the additional depreciation charged due to the revaluation.

On 30 September 20X3, Telepath Co was informed by a major customer that it would no longer be placing orders with Telepath Co.

As a result, Telepath revised its estimates that net cash inflows earned from the plant for the next three years would be:

Year ended 30 September: $
20X4 220,000
20X5 180,000
20X6 200,000

Telepath Co’s cost of capital is 10% which results in the following discount factors:

Value of $1 at 30 September:
20X4 0·91
20X5 0·83
20X6 0·75

Telepath Co also owns Rilda Co, a 100% subsidiary, which is treated as a cash generating unit.

On 30 September 20X3, there was an impairment to Rilda’s assets of $3,500,000.

The carrying amount of the assets of Rilda Co immediately before the impairment were:

$
Goodwill 2,000,000
Factory building 4,000,000
Plant 3,500,000
Receivables and cash (at recoverable amount) 2,500,000

12,000,000

Prior to considering any impairment, what is the carrying amount of Telepath Co’s plant and the balance on the revaluation surplus at 30 September 20X3?

Plant carrying amount Revaluation surplus
$000 $000
A 480 nil
B 300 185
C 480 185
D 300 nil
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