SOLVAY BRUSSELS SCHOOL OF ECONOMICS & MANAGEMENT

ADVANCED ACCOUNTING COURSE – EXERCISES SESSIONS

CASE 2 – A

IAS 16 – Property, Plant and Equipment

MODEL SOLUTION
BASE CASE – Component accounting

Background

- Construction of a power plant in Year 1

- Total cost: 1.000 as follows :
o Major part A of the plant : cost of 150 / useful life of 10 years
o Major inspection and related capital expenditures : cost of 100 (estimation) / every
5 years
o Useful life of the remainder of the plant : 30 years

- First major inspection performed at closing Year 4 / cost of 105

SUGGESTED SOLUTION

Y1

DT PPE – Major part A 150

DT PPE – Major inspection 100
DT PPE – Remainder 750 (= 1000 – 150 – 100)
CR Cash (or Trade Payables if not paid upfront) 1000

Closing Y1

DT Depreciation charge 60
CR PPE – Major part A (accumulated depreciation) 15
CR PPE – Major inspection (accumulated depreciation) 20
CR PPE – Remainder (accumulated depreciation) 25

1
Closing Y4

Idem depreciation Y1 + additional depreciation on major inspection:

DT Depreciation charge 20
CR PPE – Major inspection (accumulated depreciation) 20

DT PPE – Major inspection 105

CR Cash (or Trade Payables) 105

2
CASE B – Dismantling

SUGGESTED SOLUTION

Dismantling
- At initial recognition, cost of dismantling asset = dismantling provision

- Measurement: 200 * (1,02)33 / (1,06)33 = 56

Additional entry at recognition Y1:

DT PPE – Remainder
56
CR Dismantling provision 56

Additional depreciation at closing Y1:

DT Depreciation 2 (= 56 / 30)
CR PPE – Remainder (accumulated depreciation) 2

DT Financial charge – Dism. prov. 3 (= 56 * 0,06)

CR Dismantling provision 3