Question
A company constructed a highly sophisticated Water Filtration Plant. The cost to construct the plant was US 5,000,0000: US 1,500,000 for the land, US 1,500,000
A company constructed a highly sophisticated Water Filtration Plant. The cost to construct the plant was US 5,000,0000: US 1,500,000 for the land, US 1,500,000 for the building and US 2,000,000 for the equipment. The useful life for the plant (land, building and equipment) is 25 years. The company will dismantle and remove the assets after 25 years with a total cost of US 1,000,000. The company uses a discount rate of 10 percent in determining present values.
The following table provides an overview about land, building and equipment, together with their dismantling and removing costs:
| Land | Building | Equipment | Total |
Cost (US) | 1,500,000 | 1,500,000 | 2,000,000 | 5,000,000 |
Dismantle and remove costs (after 25 years in US) | 400,000 | 400,000 | 200,000 | 1,000,000 |
The company believes that, even though the building has a useful life of 25 years, the tiles will need to be replaced in 10 years for US 800,000, the AC system will need a major inspection every 4 years for US 380,000 and the doors of senior directors will need to be replaced every 5 years for US 20,000.
Required:
- Calculate the depreciation expense related to the building based on IAS 16
- Determine the initial cost of each fixed asset based on IAS 16
- Register the journal entry to record the initial cost of the fixed assets based on IAS 16
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