The balances listed below were extracts from the records of Hydan Co. on 31 December 2017:

PPE (carrying amount at 31 December 2016)37,400
Administrative expenses2,871
Rent received1,200
Investment (unlisted)3,000
Investment income80
Inventory at 1 January, 20172,468
Trade receivables3,492
Trade payables3,470
Research and Development recognised as Intangible Assets10,000
Cash in hand41
Bank overdraft482
Ordinary shares (£10 each)15,000
Retained earnings at 1 January, 201716,003


  1. Inventory was valued at £2,917,000 at the close of business.
  2. On 1 January 2015, Hydan Ltd. bought a plant for £200,000 (included in the PPE category of trial balance). It has an expected useful life of 20 years and a nil residual value. On 30 June 2017, Hyden Ltd. decides to sell the plant and starts actions to locate a buyer. The plant is in short supply, so Hydan Ltd. is confident that the plant will be sold fairly quickly. Its market value at 30 June 2017 is £160,000 and it will cost £5,000 agency cost. The plant has not been sold at the year end.
  • Non-current assets- tangible:

Details of the other property, plant and equipment at 31 December 2017 are:

Land at cost 20,000
Buildings at cost25,000 
Less accumulated depreciation at 31 December 2016  (10,000)15,000
Plant at cost4,800 
Less accumulated depreciation at 31 December 2016 (2,400) 

On the 30th of June 2017, Hydan Ltd. had an open market basis valuation of its PPE. The Land was valued at £21 million; Before revaluation, the buildings are depreciated on a straight line basis with 40 years expected useful life. After revaluation, buildings were valued at £16 million with 20 years of remaining expected useful life. Before revaluation, the plants were depreciated on a straight line basis with the expected useful life of 20 years. The plants were valued at £2.5 million. After revaluation, plants are depreciated with a reducing balance basis at the rate of 20%. The directors wish these new values to be incorporated into the financial statements.

  • The board has decided to pay dividends as 5p/share.
  • The revenue includes an amount of £250,000 for a sale made on credit 3rd January 2018.
  • Hydan experiences large number of credit sales transactions with terms of net 30 days. According to past experience, it believes that 0.5% of its credit sales will be uncollectible. Therefore, provision for bad debt is necessary to be accounted for.
  • Non-current assets-intangible

a). In addition to the capitalised development expenditure (of £10,000,000), further research and development costs were incurred on a new project which commenced on 1 January 2017. The research stage of the new project lasted until 31 March 2017 and incurred £105,000 of costs. from that date, the project incurred development costs of £35,000 per month. On 1st July 2017 the directors are confident that the project would be successful and yield a profit well in excess of its costs. The project is still in development at 31 December 2017.

b). Capitalised development expenditure is amortised at 10% per annum using the straight-line method. All expensed research and development is charged to the cost of sales.

No depreciation/amortisation has yet been charged on any non-current asset for the year ended 31 December 2017. All depreciation/amortisation is charged to the cost of sales.

8). According to Hydan’ Ltd.’s normal practice, it permits a transfer to be made of an amount equal to the excess depreciation from the revaluation surplus to retained earnings.


Section A. Multiple Choice Questions (20 marks in total. 4 marks for each question)

1. What is the carrying value of the plant when the revaluation was carried out on 31 June 2017?

A. £2,400,000

B. £2,280,000

C. £2,160,000

D. £2,680,000

2. How do we describe the process of adjusting the value of an asset by recognizing that it is consumed in a way that does not completely eliminate the resource?

A. adjustment

B. revaluation

C. depreciation

D. waning

3. Which of the following statements concerning the accounting treatment of research and development expenditure are true, according to IAS38 Intangible Assets?

i. Research is an original and planned investigation undertaken with the prospect of gaining new knowledge and understanding.

ii. Development is the application of research findings.

iii. Depreciation of plant used specifically on developing a new product can be capitalised as part of development costs.

iv. Expenditure once treated as an expense cannot be reinstated as an asset

A. i, ii and iii

B. i, ii and iv

C. ii, iii and iv

D. All of the above

4. Hydan Ltd. decides to build an office building, to be occupied by its own staff. Tangible non-current assets at initially measured at cost. (C)

Which TWO of the following expenses incurred by the building contractor cannot be included as a part of the cost of the office building?

(i). Interest incurred on a specific loan taken out to pay for the construction of the new offices.

(ii). Direct building labour costs

(iii). A proportion of the contractor’s general administration costs

(iv). Hire of plant and machinery for use on the office building site

(v). Additional design work was caused by errors made initially

(vi). Delivery costs in getting the raw materials onto the site

A. (i) and (iii)

B. (i) and (iv)

C. (iii) and (v)

D. (v) and (vi)

5. According to IAS36 Impairment of Assets, an entity’s assets are carried at the value as:

A. The lower of carrying value and fair value less costs of disposal

B. The higher of fair value less costs of disposal and value in use

C. The higher of fair value less costs of disposal and recoverable amount

D. The lower of carrying value and recoverable amount

Section B. Fill in the blanks 20 Marks, 2 Marks for each answer

1. The journal entries for note 3 for the adjustment of the revaluation of the building on 30 June 2017 is:

Dr. ___________________  

Cr. ___________________                   

Cr. ___________________ 

2. The carrying amount of the asset held for sale at the date of the reclassification (30 June 2017, note 2) is: £_________________.

The relevant journal entries for the reclassification of the asset held for sale (note 2) are:

Dr. ____________________

Dr. ____________________        

Cr. ____________________      

3. According to note 6, the amount of the doubtful debt provision is £________________.

4. The relevant journal entries for the dividend distribution (note 4) are:

Dr. ________________

Cr. ________________

Section C. Profit and Loss Statement & Statement of Financial Position

1. Draft the statement of comprehensive income of Hydan Ltd for the year ending 31st December 2017.                                                              (15 marks)

2. Draft the statement of financial position of Hydan Ltd for the year ended 31st December 2017.                                                                               (25 marks)

Section D. Answer the following question:

Distinguish between the cost model and the revaluation model for the measurement of property, plant and equipment subsequent to its initial recognition, and discuss the different impacts of the two models on the financial statements.   (20 marks)                                                                     

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