50.1K

Verified Solution

Link Copied!

QUESTION 2: Epsilon prepares financial statements to 31 March each year. The following events have occurred which are relevant to the year ended 31 March 2017: (i) On 1 April 2016, Epsilon purchased a new head office property for $60 million. On 1 April 2016, Epsilon leased out the top three floors of the property to a third party on a long-term operating lease. The annual rental receivable by Epsilon was $2 million, starting on 31 March 2017. The top three floors of the property were capable of being sold in a separate transaction. On 1 April 2016, the directors of Epsilon estimated that the initial cost of the property should be allocated as follows for accounting purposes: $ million Top three floors of building 15 Remainder buildings component 20 Remainder land component 25 Total initial cost 60 On 31 March 2017, the property had an estimated total fair value of $64 million. The directors consider that 25% of this fair value was attributable to the top three floors of the property. The directors of Epsilon wish to use the cost model for measuring property, plant and equipment and the fair value model for measuring investment property. Epsilon depreciates the buildings component of properties over an estimated useful life of 50 years, with no estimated residual value. The rental payable to Epsilon on 31 March 2017 was paid in accordance with the terms of the lease. (ii) On 1 April 2016, Epsilon purchased a brand from a competitor for an agreed price of $80 million. The directors of Epsilon believe that the useful life of the brand is indefinite. On 31 March 2017, no reliable estimate of its selling price was available but the directors of Epsilon estimated that the value in use of the brand was $85 million. The directors of Epsilon wish to use the fair value model for measuring intangible assets whenever permitted by International Financial Reporting Standards. Required: Explain and state how the two events should be reported in the financial statements of Epsilon for the year ended 31 March 2017.

Answer & Explanation Solved by verified expert

See Answer