IAS 16 Property Plant Equipment

1. B Company purchase a drilling machine on 1st January for tk. 75,000. The useful life of the
machine is 3 years with residual value at the end of this period of tk. 8,000.
During its useful, the expected units of production from the machine are:
2017 - 12000 units
2018 - 7000 units
2019 - 5000 units
Requirement
Using most appropriate depreciation method permitted by the (PPE) IAS 16. Calculate the
charge to depreciation for 2018.
Solution:
As per IAS 16 para 56 which indicate that assets are consumed principally throughout their
use.
7,000
= (75,000 – 8,000) *
12,000+7,000+5,000

= 19,542
2. K company purchase a second hand folding machine from a competitors who has gone
bankrupt. It will occur the following cost:
Agreed price to be paid to vendor 11,000
Dismantling the machine at its current position and locations 750
Transportation to K’s company 350
Machine refurbishment cost prior to reinstallation 175
Requirement
Under IAS 16, PPE what should be the total cost included in non – current asset be irrespective
of the machine.
Solution:
The current answer includes all the costs listed since they are all required to bring the machine
into working condition.
So the cost of non-current assets are:
Agreed price to be paid to vendor 11,000
Dismantling the machine at its current position and locations 750
Transportation to K’s company 350
Machine refurbishment cost prior to reinstallation 175
12,275
3. M company has 31 December year ended. It acquired a standing machine on 1st October
2014 at a cost of tk. 35,000. And depreciated it @ 25% p.a. on a straight line basis.
On 1st October 2016 tk. 7000 was spent on an upgrade to the machine in order to improve
its efficiency and increase the inflow of economic benefit over its life.
Requirement:
As per IAS 16 (PPE) what depreciation charge should be charged to P/L for the year ended
31 December 2017.
Solution:
Depreciation for each separates part of equipment should be calculated separately as per
IAS 16 para 48.
The original machine would be depreciated in each years ended 30 September 2015 and
2016.
Therefore the asset had two years useful life remaining when the upgrade was purchased.
The expense recognized for year 2017:
35,000 * 25% 8750
7000/2 3500
12,250
4. The N Company operates in the petrol refining industry. A fire at a competitor using similar
plant has revealed a safety problem and the Government has introduced new regulations
requiring the installation of new safety equipment in the industry. The refinery had a
carrying amount of BDT30 million before the installation of the safety equipment. The new
safety equipment cost BDT5 million and was fully operational at 31 December 20X7, but
it does not generate any future economic benefits. The refinery would, however, be closed
down without such equipment being installed.
At 31 December 20X7 the net selling price of the refinery was estimated at BDT33 million.
In determining its value in use, the directors have determined that the refinery would
generate annual cash flows of BDT3.2 million from next year in perpetuity, to be
discounted at 10% per annum.
Requirement
According to IAS 16 Property, Plant and Equipment, what is the carrying amount of the
refinery in N's statement of financial position at 31 December 20X7?
Solution:
5. The O Company acquired a piece of machinery for £800,000 on 1 January 20X6. It
identified that the asset had three major components as follows:
Component Useful life Cost
£'000
Pump 5 years 110
Filter 4 years 240
Engines 15 years 450
Under the terms of the 15-year license agreement for the use of the machinery, the engines (but
not the other components) were to be dismantled at the end of the license period. The machinery
contained three engines, and dismantling costs for all three engines were initially estimated at
a total cost of £480,000 (ie, £160,000 per engine) payable in 15 years' time. O's discount rate
appropriate to the risk specific to this liability is 7% per annum.
One of the three engines developed a fault on 1 January 20X7 and had to be sold for scrap for
£40,000. A replacement engine was purchased at a cost of £168,000 on 1 January 20X7, for
use until the end of the license period, when dismantling costs on this engine estimated at
£150,000 would be payable.
At a rate of 7% per annum the present value of £1 payable in 15 years' time is 0.3624 and of
£1 payable in 14 years' time is 0.3878.
Requirement
Calculate the following figures for inclusion in O's financial statements for the year ended 31
December 20X7 according to IAS 16 Property, Plant and Equipment, and IAS 37 Provisions,
Contingent Liabilities and Contingent Assets.
(a) The carrying amount of the machinery at 31 December 20X6
(b) The profit/loss on the disposal of the faulty engine
(c) The carrying amount of the machinery at 31 December 20X7
Solution:
6. The G company operates in a chemical industry. An explosion occurred at one side in its
accounting year to 31 December 2016 which damage substantial price plant and cost of
impairment loss in its value of tk. 4.0 million.
Insurance investigation for compensation for/of the impairment were not finalized until the
year 31 December 2017. As a result it was agreed that G company would receive tk. 2.0
million in full settlement of the claim. The cash will actually be received by G company in
31 December 2018.
Requirement:
As per IAS 16 determine the accounting period in which the requirement of the
compensation should be recognized to G company financial statement.
Solution:
Impairment of 4 million in 2016, compensation of 2 million in 2017. IAS 16.65 and 16.66
requires the impairment to be recognized under IAS 16 normal rules. So when it occurs in
2016, also compensation for impairment to be recognized when it is receivable.