Question
Burke Ltd has recently purchased an item of plant from Pusey Ltd. The details of this are as follows: Details $ Basic list price of
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:
- Straight line method.
- 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:
- 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:
- Straight line method.
- Reducing balance method
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