Crocs Proprietary Limited “Crocs” was incorporated on 1 February 2021. Soon after its incorporation, Crocs entered into an agreement with the municipality to lease a vacant piece of land. As per the lease agreement, Crocs may erect a structure on the land, but the company is obligated to dismantle and remove the structure at the end of its useful life and restore the land to its original state.
The construction of the building, which will house the abattoir operations, started in February 2021. It was completed on 30 April 2021 and recorded in the accounting records with a total cost of R2 670 000.
The following journal entry was recorded on 30 April 2021
DR Property, plant, and equipment 2 670 000
CRPayables 2 670 000
The building was available for use on the same day. The management of Crocs estimated the future dismantling, removal, and restoration costs to be R750 000. An appropriate discount rate (after tax) of 9% was determined.
The estimated useful life of the building is 20 years. Included in the total construction costs of the building (R2 670 000), were the following costs:
• Light steel costing R50 100 which was damaged irreparably during the construction of the building.
• Cost of R30 023 incurred to advertise the date of the opening of the facility on 1 June 2021.
The 4 machines used on the production line, with a total cost of R880 000 were fitted and installed by 1 May 2021 and available for use on the same day. The machines were brought into use on 1 June 2021, on the day of the opening of the facility. The estimated useful life of machinery is 10 years.
On 29 March 2023, the engine of one of the machines sparked and caught alight due to unscheduled loadshedding on that day. The engine was replaced at a cost of R18 000. It was not identified as a significant component at initial recognition. Its estimated useful life is 3 years.
Required:
3.1.1 Critically discuss the accuracy of the initial measurement of the building recorded in the financial records of Crocs (Pty) Ltd for the year ended 30 April 2021. Show all calculations as marks are awarded. ( 10 marks)
3.1.2 Prepare the correcting journals due to your discussion in 3.1.1 for Crocs (Pty) Ltd for the year ended 30 April 2021. ( 5 marks )
3.1.3 Calculate the correct cost of the building.
3.2 Prepare the property, plant and equipment note to the financial statements of Crocs (Pty) Ltd for the year ended 30 April 2023. Show calculations as marks are awarded.The total column is not required. (16 marks)
3.3 Show the value at which property, plant and equipment will be reflected in the ( statement of financial position of Crocs (Pty) Ltd as at 30 April 2023. (2 marks)
