Simon Ltd are a manufacturing company with a financial year

Simon Ltd are a manufacturing company with a financial year end 31 December 2020.

The following 2 items took place during the year ended 31 December 2020.

ITEM 1

Simon Ltd commenced the self-construction of a new property as a factory for the business on 1 February 2020. The building was completed on 31 October 2020 and the following costs were incurred by Simon Ltd:

                                                                 €’000
Site preparation costs                               150
External labour costs (Note 1)                  850
Materials (Note 2)                                     1,750
Production Overheads Directly
Incurred                                                     600
Professional fees                                       50
Delivery Costs                                          15
Interest cost from 01/01/20 –
31/12/20 (Note 4)                                    210
                                                         3,625

Note 1: External Labour Costs

A one-month delay in construction was caused by a work stoppage in June
2020 and this increased the external cost of labour by €100,000. This amount is included in the labour costs above.

Note 2: Materials.

Due to inadequate storage some building materials had to be destroyed and replaced at a cost of €350,000. This cost is included in the materials costs above.

Note 3: Future Costs

As Part of the Planning conditions, Simon Ltd must dismantle the building and restore the site. The cost of completing this work is estimated at €750,000 in 20 years’ time. Based on the current cost of capital the value of €1 in 20 years’ time is €0.22

Note 4: Interest Costs

Interest Costs are for a €3,000,000 loan which was taken out on 1 January 2020. The interest rate on the loan is 7%.

ITEM 2

Simon Ltd. incurred the following expenses during the production of an item of inventory:

                                                          €
Purchase price of materials   15,000
Direct labour costs                     7,500
Allocation of fixed production overheads   4,500
Storage costs during manufacture   300
Storage costs since product completed   200
Advertising costs   420
Total Costs   27,920

Notes:

1. All of the costs above are VAT exclusive as it is recoverable by the company. However, the import taxes are non-refundable.
2. Import taxes are charged at 8% on the purchase of the materials.
3. Simon receives a 10% trade discount on the purchase of materials. The full purchase price is included in purchase price of materials above.
4. One quarter of the materials included above was wasted as a result of abnormal machine malfunction.
5. Production was delayed while waiting for new materials to arrive. Labour
costs during the delay amounted to €1,750 and this amount is included in labour costs above.
6. Fixed production overheads are allocated to products based on production at normal capacity. However, production was below capacity this period and an allocation of €800 was added to fixed production overheads and included in the amount above.
7. Advertising costs were incurred while trying to find a buyer, however no buyer has yet been found.

Please turn over

Write a report to the directors of Simon Ltd detailing the following:
a) Making reference to the relevant accounting standards, explain how the above expenses should be accounted for in the financial statements of Simon Ltd for Items 1 and 2.
b) Calculate the amount to be recorded in the Financial Statements of Simon Ltd as the cost price of the property in Item 1.

c) If the property has a useful life of 20 years with zero residual value, what will be the depreciation charge and carrying value of the asset at 31/12/2020.

d) Calculate the value of the completed inventory in Simon Ltd.’s financial statements for Item 2.