Burke Ltd has recently purchased an item of plant from Pusey Ltd. The details of this are as follows:

Details	$
Basic list price of plant	240,000
Trade discount applicable to Burke Ltd 12.5% on list
Ancillary costs:
Shipping and handling	2,750
Estimated pre-production testing	12,500
Maintenance contract for 3 years	24,000
Site preparation costs:
Electrical cable installation	14,000
Concrete reinforcement	4,500
Own labour costs	7,500

Burke Ltd paid for the plant (excluding the ancillary costs) within four weeks of order, thereby obtaining an early settlement discount of 3%. Burke had incorrectly specified the power loading of the original electrical cable to be installed by the contractor. The cost of correcting this error of $6,000 is included in the above figure of $14,000. The plant is expected to last for 10 years. At the end of this period there will be compulsory costs of $15,000 to dismantle the plant and $3,000 to restore the site to its original use condition.

Required:

Calculate the amount at which the initial cost of the plant should be measured, ignoring discounting.

Solution

Basic list price	240,000
Trade discount of 12.5%	(30,000)
Shipping and handling	2,750
Estimated pre-production testing	12,500
Electrical cable installation (14,000-6,000)	8,000
Concrete reinforcement	4,500
Own labour costs	7,500
Dismantling and restoration costs (15,000+3,000)	18,000
	263,250

Note:

• The early settlement discount is treated as income rather than a reduction in the asset cost.
• The abnormal costs associated with the cable error are not allowed to form part of the capitalised cost as per IAS16.
• The maintenance contract is a revenue expense and may not be capitalised.

Depreciation

Depreciation according to IAS16 is the systematic allocation of the depreciable amount of an asset over its useful life. The depreciable amount is the cost of an asset, or other amount substituted for cost, less its residual value. Depreciation is recognised as an increase to the provision for accumulated depreciation (and so a reduction in the carrying amount of an asset) and as an expense by:

Dr Depreciation account

Cr Accumulated depreciation/Provision for depreciation

Methods of Depreciation

The method of depreciation used must reflect the pattern in which the assets future economic benefits are expected to be consumed by an entity. The method of depreciation should not reflect the pattern in which the asset generates revenue (since this is affected by other factors such as demand).

There are two key methods of depreciation:

1. Straight line method.
2. Reducing balance method

   Burke Ltd has recently purchased an item of plant from Pusey Ltd. The details of this are as follows:

   Details	$
   Basic list price of plant	240,000
   Trade discount applicable to Burke Ltd 12.5% on list
   Ancillary costs:
   Shipping and handling	2,750
   Estimated pre-production testing	12,500
   Maintenance contract for 3 years	24,000
   Site preparation costs:
   Electrical cable installation	14,000
   Concrete reinforcement	4,500
   Own labour costs	7,500

   Burke Ltd paid for the plant (excluding the ancillary costs) within four weeks of order, thereby obtaining an early settlement discount of 3%. Burke had incorrectly specified the power loading of the original electrical cable to be installed by the contractor. The cost of correcting this error of $6,000 is included in the above figure of $14,000. The plant is expected to last for 10 years. At the end of this period there will be compulsory costs of $15,000 to dismantle the plant and $3,000 to restore the site to its original use condition.

   Required:

   Calculate the amount at which the initial cost of the plant should be measured, ignoring discounting.

   Solution

   Basic list price	240,000
   Trade discount of 12.5%	(30,000)
   Shipping and handling	2,750
   Estimated pre-production testing	12,500
   Electrical cable installation (14,000-6,000)	8,000
   Concrete reinforcement	4,500
   Own labour costs	7,500
   Dismantling and restoration costs (15,000+3,000)	18,000
   	263,250

   Note:

3. The early settlement discount is treated as income rather than a reduction in the asset cost.
4. The abnormal costs associated with the cable error are not allowed to form part of the capitalised cost as per IAS16.
5. The maintenance contract is a revenue expense and may not be capitalised.

6. Depreciation

   Depreciation according to IAS16 is the systematic allocation of the depreciable amount of an asset over its useful life. The depreciable amount is the cost of an asset, or other amount substituted for cost, less its residual value. Depreciation is recognised as an increase to the provision for accumulated depreciation (and so a reduction in the carrying amount of an asset) and as an expense by:

   Dr Depreciation account

   Cr Accumulated depreciation/Provision for depreciation

   Methods of Depreciation

   The method of depreciation used must reflect the pattern in which the assets future economic benefits are expected to be consumed by an entity. The method of depreciation should not reflect the pattern in which the asset generates revenue (since this is affected by other factors such as demand).

   There are two key methods of depreciation:

7. Straight line method.
8. Reducing balance method