Professional Documents
Culture Documents
Subsequent
Initial R&M
R&M
A.
B. Self Revaluation
Cash/Credit C. Barter Cost Model
Construction Model
purchase
(i) The accountant capitalized 5,00,000/- incorrectly since internal ABC Ltd. traded an old machine with carrying amt. of 16,800/-
profits should not be included. Amount to be capitalized = and paid cash difference of 6,000/- for new machine with cash
1000 bags X 400 = 4,00,000/- price of 20,500/-.
(ii) Rental income should not have been deducted from cost since
Commercial Substance & fair value is given.
it was not an incidental operation necessary to bring PPE
The fair value of new machine is clearly evident in this case and
to present location & condition. It should be transferred to
hence, transaction to be recorder at 20,500.
P&L.
New Machine a/c ………. Dr. 20,500
Adjusted Cost = 25,00,000 (-) 5,00,000 (+) 4,00,000 (+) 25,000 =
P&L a/c ……………………..Dr. 2,300 (b.f.)
24,25,000/-
To Cash a/c 6,000
To Old Machine 16,800
Some Misc.
Topics
Increases
• Recognize as PPE if it • If PPE has 2 or more future Whether major
significant components with economic or not?
satisfies the definition of
substantially different benefit?
PPE. useful lives/usage/flow of
• If not, then recognize as economic benefits, recognize
Inventory as per Ind AS 2. each component separately
• If recognized as PPE, • When a significant component
depreciate over useful life. is replaced:
• If principal PPE (i) Derecognize old
discarded/sold, net component’s carrying amt.
(ii) Capitalize cost of new
Capitalize with
YES NO Charge to
carrying amt. of spares PPE &
component depreciate over P&L
should be w/off in P&L. own useful life
Q1. ABC Ltd. acquired vehicle for 1,00,000/- with life of 10yrs. At the end
of 6th year, engine require replacement whereas remainder of vehicle is
perfect. Cost of new engine is 45,000/-. Discount rate = 5%. Discuss
accounting treatment.
Q3. A shipping co. is reqd. to bring all ships to dry dock every 5 yrs. for
A1. PV of engine = 45,000 X PVIF (5%, 6years) = 45,000 X 0.7462 = 33,580/- major overhaul. Such expenditure makes ship seaworthy & must be
Carrying amt. of machine at the end of 6th year = 100,000 – (100,000/10 X 6) = capitalized. A ship costing 20 million with 20yrs. life must have overhaul
1,00,000 – 60,000 = 40,000/- every 5yrs. Estimated overhaul costs at 5year point is 5 million. Actual cost
Carrying amt. of engine at the end of 6th year = 33,580 – (33,580/10 X 6) = at 6th year was 6 million. Explain accounting treatment.
33,580 – 20,148 = 13,432/-
Therefore, carrying amt. at the end of 6th year = 40,000 – 13,432 + 45,000 = A3. Ship a/c …………………………. Dr. 15
71,568/- Overhaul Component a/c ……….. Dr. 5
To Bank a/c 20
Q2. Which of the following expenditures should be capitalized & why? Carrying amt. of ship after 5yrs. = 15 – (15/20*5) = 15 – 3.75 = 11.25 million
Carrying amt. of overhaul component after 5yrs. = Nil
Expenditure Answer
11.25 million
th
At 6 year: Overhaul Component a/c ……….. Dr. 6
Routine Repairs No
To Bank a/c 6
Major Overhaul Exp. Yes Carrying amt. of ship after next 5yrs. = 11.25 – 3.75 = 7.5 million
Carrying amt. of overhaul component after 5yrs. = Nil
Replacement of roof tiles Yes 7.5 million
Substantial improvements to electrical wiring Yes
Q4. Jain Ltd. acquired building which had non-moving tenants.
system which will increase efficiency
Subsequently the co. paid 50lakhs compensation to the so that property
could be leased to 3rd party at much higher rate.
A4. Compensation paid to tenants enhances the value of building & increases
FEB, hence, satisfies recognition criteria. Hence, 50lakhs should be added to gross
book value of building.
Revaluation Model
Revaluation
It is not mandatory Accounting
Land Book Value =
Should be checked 100
regularly by a
professionally qualified
valuer.
A ltd. sold some of its PPE for 100lakhs. WDV was 250lakhs.
If the entity followed These assets were revalued earlier and revaluation surplus of
200lakhs existed on date of sale.
Revised Depreciation= (12,00,000 – 3,00,000)/10= 90,000p.a. Depreciation a/c (P&L) Dr. 18,750
To PPE a/c 18,750
Q3. ABC lid. Is a pharma co involved in R&D. It acquired a (Being asset depreciated)
machine for 20lakhs for development activities with est. useful life
Revaluation Surplus a/c Dr. 8,750
of 10 yrs. The accountant depreciated asset on SLM & charged
depreciation to P&L. To Retained Earnings 8,750
A3. In the given case, PPE is used for development activities. The FEB (Accounting policy: amt. is transferred to revenue reserve)
Addition/extension to an existing asset
Est. useful life of machine is 6years. Machine is used with an
Addition/Extension attachment having useful life of 10yrs. Cost of machine =
60,000/- & cost of attachment = 6,000/-. Terminal value for
both is NIL. SLM depreciation is used.
YES NO
Allocated ohd. Costs – 50,000/- p.m. Employment costs 1400 7-month period
Income recd. During temporary use of factory premises as a car park Direct ohd. Costs 700 7-month period
during construction period – 50,000/- Allocated overheads Nil Not a direct costs
Costs of relocating employees to work at new factory – 300,000/- Income from car park Nil Not related (P&L item)
Costs of opening ceremony on 31.01.11 – 150,000/- Relocation Costs Nil Not a direct cost
Opening ceremony Nil Not a direct cost
Factory was completed on 30.11.11 & production began on 01.02.12. Useful
life of factory was 40 yrs. from date of completion. It is estimated that Finance Costs 700 8-month period
roof will need to be replaced 20yrs. after date of completion & cost of
Temporary investment income (100) Directly related
replacement will be 30% of total cost of building.
Demolition costs 920 Obligation recognized
At 40 yr. end, Sun ltd. Has legally enforceable obligation to demolish
TOTAL 20,000
factory & restore site to its original condition. Est. cost of demolition is
20 million. Annual risk-adjusted discount rate is 8%. PV of Re.1 payable Particulars Amount (‘000) Explanation
in 40yrs. @ 8% is 4.6 cents.
Depreciable Amount 10,000 20,000 – 10,000
Construction of factory was partly financed by 17.5 million loan taken on Depreciation of roof (50) 10,000X30%X1/20X4/12
01.04.11 @ 6%. During 01.04.11 to 31.08.11, Sun ltd. Recd. Investment Depreciation of remainder (58) 10,000X70%X1/40X4/12
income of 100,000/- om temporary investment of the proceeds.
TOTAL 19,892