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Cost elements of a PPE item AC Entity as well as all of AC Entity's suppliers are registered VAT vendors. On 1 January 20.7, AC

Cost elements of a PPE item

AC Entity as well as all of AC Entity's suppliers are registered VAT vendors. On 1 January 20.7, AC Entity purchased a machine for $1 462 719 (including VAT). During January 20.7, AC Entity incurred the following costs (which, where applicable, include VAT @14%

Delivery costs to deliver the machine to the premises of AC Entity to the amount of $143 750; and

Installation costs by an external service provider to the amount of $258 750.

During January 20.7, AC Entity's engineer incurred the following costs to modify the machine so that it can produce/operate as required by AC Entity:

Material to the amount of $85 000. AC Entity used its own maintenance material on hand; and

Labour costs to the amount of $90 000. AC Entity used its own maintenance employees.

During January 20.7, two of AC Entitys employees were trained to operate the machine. The following costs were incurred in this regard:

Costs of an external expert instructor to the amount of $14 250; and

Employee benefits in respect of the two employees for the period of the training to the amount of $8 000.

During February 20.7 the machine was tested. The following costs were incurred in this regard:

Material to the amount of $48 421. The test products were sold as scrap for R6 900; and

Employee benefits in respect of AC Entity's employees that were involved in test runs in respect of the machine to the amount of $22 000.

On 1 March 20.7, the machine was ready for use and was also put into service on this date.

Due to the low levels of orders AC Entity suffered a loss of $48 000 during March 20.7 from operating the machine.

In the production process, the machine produces water that is contaminated with a specific chemical. The water is purified on site. At the end of the useful life of the machine, which is estimated at 10 years, AC Entity has to dismantle the machine and rehabilitate the direct environment. On 1 March 20.7, the present value of the dismantling and rehabilitation costs was estimated at $215 000 (excluding VAT).

Required:

a) Indicate what the cost of the machine is at initial recognition.

b) Provide a journal entry (in the general journal of AC Entity) to correctly account for the applicable part of the cost of the employee benefits in respect of the machine.

c) Provide a journal entry (in the general journal of AC Entity) to correctly account for the cost to rehabilitate the environment.

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