BLUES Limited (BLUES) prepares its financial statements to 31 December each year. The company manufactures paint, and its operations are divided into two income-generating units, domestic and commercial. The following issue needs to be resolved before the financial statements for the year ended 31 December 2008 can be finalized.

In December 2008, BLUES announced publicly its intention to reduce the level of additives in all of the company’s domestic and commercial paints. This will involve modifying the company’s plant and equipment at an estimated cost of €12,000,000, payable in equal annual instalments over the next six years, commencing in December 2009. Plant and equipment at 31 December 2008 had an average remaining useful economic life of six years. The changes were prompted by market pressures and evaluated using discounted cash flow techniques. The discount rate used was 10%.

Requirement Explain how this should be accounted for, and show the amounts to be included in the financial statements for the year ended 31 December 2008.

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Present value factors: Rate/Period 1 2 3 4 5 6 10% 0.909 0.826 0.751 0.683 0.620 0.564 12% 0.893 0.797 0.712 0.636 0.567 0.507