Gerrard acquired an item of plant at a cost of £800,000 on 1 January 2018 that is used to produce and package pharmaceutical pills. The plant had an estimated residual value of £50,000 and an estimated life of five years. Gerrard uses straight-line depreciation. On 31 December 2020 (after depreciation had been calculated for the year), Gerrard was informed by a major customer (who buys products produced by the plant) that it would no longer be placing orders with Gerrard. Even before this information was known, Gerrard had been having difficulty finding work for this plant but by modifying production methods Gerrard now estimates that the plant will have three more years of useful life, and net cash inflows will be as follows: Year ended: £000 31 December 2021 220 31 December 2022 180 31 December 2023 170 On 31 December 2023, the plant is still expected to be sold for its estimated realisable value. Gerrard has confirmed that there is no market in which to sell the plant at 31 December 2020. Gerrard's cost of capital is 10% and the following values should be used: Value of £1 at: End of Year 1 End of Year 2 End of Year 3 0.91 0.83 0.75
Gerrard acquired an item of plant at a cost of £800,000 on 1 January 2018 that is used to produce and package pharmaceutical pills. The plant had an estimated residual value of £50,000 and an estimated life of five years. Gerrard uses straight-line depreciation. On 31 December 2020 (after depreciation had been calculated for the year), Gerrard was informed by a major customer (who buys products produced by the plant) that it would no longer be placing orders with Gerrard. Even before this information was known, Gerrard had been having difficulty finding work for this plant but by modifying production methods Gerrard now estimates that the plant will have three more years of useful life, and net cash inflows will be as follows: Year ended: £000 31 December 2021 220 31 December 2022 180 31 December 2023 170 On 31 December 2023, the plant is still expected to be sold for its estimated realisable value. Gerrard has confirmed that there is no market in which to sell the plant at 31 December 2020. Gerrard's cost of capital is 10% and the following values should be used: Value of £1 at: End of Year 1 End of Year 2 End of Year 3 0.91 0.83 0.75
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
The following issue relate to clients of the firm of accountants you work for. Each
company has a year-end of 31 December 2022.
You are required to prepare detailed notes for your manager explaining the appropriate
accounting treatments in each case along with supporting calculations as necessary.
You should cite relevant accounting regulations in your answer.
Transcribed Image Text:Gerrard acquired an item of plant at a cost of £800,000 on 1 January 2018 that is used to produce
and package pharmaceutical pills. The plant had an estimated residual value of £50,000 and an
estimated life of five years. Gerrard uses straight-line depreciation. On 31 December 2020 (after
depreciation had been calculated for the year), Gerrard was informed by a major customer (who
buys products produced by the plant) that it would no longer be placing orders with Gerrard. Even
before this information was known, Gerrard had been having difficulty finding work for this plant but
by modifying production methods Gerrard now estimates that the plant will have three more years
of useful life, and net cash inflows will be as follows:
Year ended:
£000
31 December 2021 220
31 December 2022 180
31 December 2023 170
On 31 December 2023, the plant is still expected to be sold for its estimated realisable value. Gerrard
has confirmed that there is no market in which to sell the plant at 31 December 2020. Gerrard's cost
of capital is 10% and the following values should be used:
Value of £1 at:
End of Year 1
End of Year 2
End of Year 3
0.91
0.83
0.75
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