Question

2. Tippee Co, , prepares financial statements to 31^st December each year. Before the financial statements for the year ended 31^st December 20X6 can be finalised, the following points need to be addressed:

1. Tippee received planning permission to operate a wind turbine. The cost of constructing the wind turbine was £100,000. The wind turbine was completed and began operation on 1^st January 20X6. The planning permission required that the turbine is removed after 20 years. The company estimates the cash cost of doing this will be £15,000. The company took 6 months to construct the asset during which it incurred borrowing costs relating to the asset of £4,500. Assume a discount factor of 5% where relevant.           

2. During the year Tippee received consultancy services. It used a consultancy Hardman Consulting, a business owned and managed by Ava Gray, the daughter of one of Tippee’s directors.                       

Requirement

For each of the issues above, EXPLAIN how the issue should be treated in the financial statements for the year ended 31^st December 20X6, showing calculations where appropriate.

Answer 1

a.The wind turbine should be recorded/accounted as an (operating) long-term asset at the construction cost PLUS PV of Borrowing costs +Present value of the dismantling expenses , at 5%

ie. 100000+(4500/1.05^0.5)+(15000/1.05^20)=

110044.89

b.The fact that the company avails consultancy services from a director's relation & the nature of the relationship , should be disclosed ,as footnotes to the financial statements, so that the users become aware of the presence of such dealings.