Reference no: EM131644100

Question: ABC Ltd is a large company registered in Wellington for the purpose of constructing blocks of home units and town houses. The Company conduct its activities in all parts of the country. The managing director, Richard Max, who is keen to show favourable profit figures, especially profit from operations, is confronted with a number of doubtful issues. He has asked you, the accountant, to clarify the accounting treatment for each of these issues in order to finalize the accounts for the year ended 30 June 2017.

1. Last year, the company acquired land at Christchurch, and had begun construction of 15 town houses on this land. The construction work was three-quarters finished when a bushfire swept through the area on the 16 February 2017, The Company had a policy of self-insurance, and estimated that the loss incurred was approximately $ 2.5 million. Fire danger in the locality of Christchurch is extremely high during the late summer months every year.

2. Many years ago, the company purchased a large tract of land at Napier for $ 1.5 million, for the purpose of erecting home units. Because of recession, construction work was delayed. Last November, the company received an offer for the land for $3million. The offer was considered too good to refuse, and the land was sold at this price to the offer on 30 November 2016.

3. The company also holds land at South Auckland, which it had purchased some years ago for $600 000. Unfortunately, part of the land subsided because of old coal mines that had not been recorded in the government's records because the mines were closed before records were kept. Consequently, the land was regarded as unsuitable for building purpose. The Company believes that the land is worth only $ 300,000 at the end of the reporting period, and it intends to revalue the land down to this recoverable amount. However, in the North Auckland, other land held by the company has jumped considerably in value from cost of $ 800,000 to an estimated $ 1.2 million. Max intends to revalue this land to offset the loss on the downward valuation of the land at South Auckland.

4. Land costing $ 200,000 was purchased some years ago at Waikato. An application to have the land rezoned for the purpose of constructing town houses was unsuccessful, and the company sold the land for $ 350,000 on 16 April 2017.

5. The company had acquired, for $2.5million, a piece of land for construction of an international hotel and casino on the waterfront, Wellington. At that time (2014), the local council was enthusiastically pro-development and the company was given all necessary approvals to commence construction. Construction began in 2015, and costs of $3 million had already been incurred when lobbying by conservations caused the government to halt the company's work on the project in May 2016. The subsequent court case did not favour the company's arguments for continuation of the project, and the project had to be abandoned in February 2017. The company lost $4 million in sunk costs and legal fees. Max Suggested that the loss should be written off against retained earnings because it was really a loss incurred in the previous financial years when work ceased.

Required - Advise Max on the most appropriate treatment in the financial statements for each of the above circumstances. (Hints: Assumed that the company is large enough to be required by the Companies Act to present an annual financial report to the FMA).