As 10

CHAPTER-5 Assets Based Accounting Standards
AS-10 : PROPERTY, PLANT AND EQUIPMENT

v Applicability:
This standard is mandatorily applicable for accounting periods commencing on or after
01.04.2016 for ALL Entities.
v Non-Applicability:
1. Biological assets related to agriculture activity other than bearer plant.
This standard applies to bearer plants but it does not apply to the produce on the bearer
plant
Where,
Biological asset is a living animal or plant. E.g. bullock, horse, tea bushes
Agriculture activity is the management by an enterprise of the biological transformation
and harvest of biological assets for sale or for conversion into agriculture produce or into
additional biological assets.
Bearer plant is a plant that:
Ø is used in the production or supply of agriculture produce
Ø is expected to bear produce for more than a period of 12 months; and
Ø has a remote likelihood of being sold as agriculture produce, except for incidental
scrap
e.g. Coconut tree, orange tree, mango tree is a bearer plant and covered by AS-10.
The following are not bearer plant:
Ø plants cultivated to be harvested as agriculture produce e.g. Trees grown use as lumber
(Example: Timber used for construction of building)
Ø plants cultivated to produce agricultural produce when there is more than a remote
likelihood that the entity will also harvest and sell the plant as agricultural produce,
other than as incidental scrap sales. E.g. trees that are cultivated both for their fruit
and their lumber. (Example: plantain trees)
Ø annual crops (e.g. wheat, rice)
Agricultural produce is the harvested product of biological assets of the enterprise.
e.g. Coconut, orange, mango is a produce of bearer plant so not covered by AS-10.
2. Wasting assets including mineral rights, expenditure on the exploration for and extraction
of minerals, oil, natural gas and similar non regenerative resources
However AS-10 applies to items of Property, Plant and equipment used to develop or maintain
the assets described in 1 and 2 above.
3. Other accounting standards may require recognition of an item of Property, plant and
equipment on a different approach. E.g. Lease (AS-19), Any asset acquired under amalgamation
(AS-14)
4. Investment property (AS-13) is accounted as per cost model of AS-10 only. v Objective:
AS-10 deals with recognition of property, plant and equipment, depreciation, carrying]
180 Navkar Institute

amount and recognition of an impairment loss.

v Definitions:
a. Fixed Asset: It is an asset held with the intention of being used for the purpose of
providing goods or services and is not held for sale in the normal course of business
and expected to be used for more than one account ting period.
b. Fair Value: It is the price that would be agreed to in an open and unrestricted market
between knowledgeable and willing parties dealing at arm’s length who are fully
informed and are not under any compulsion to transact.
c. Gross book value: Gross book value of a fixed asset is its historical cost or other amount
substituted for historical cost in the books of account or financial statements. When
this amount is shown net of accumulated depreciation, it is termed as net book value.
v Recognition:
The cost of an item of PPE should be recognized as asset if and only if
· It is probable that future economic benefits will flow to the enterprise and
· The cost can be measured reliably.
Items such as spare parts, stand-by equipment and servicing equipments are recognized as
per AS-10 when they meet recognition criteria otherwise it will be classified as an inventory.
The definition of “Property, Plant & Equipment” covers tangible items which are held for use
or for administrative purpose.
So we can say that asset used for
Ø Selling and distribution
Ø Finance and accounting
Ø Personnel and other function of the enterprise also covered byAS-10.
e.g. A chemical manufacturer may install new chemical handling process to comply with
environmental requirements for the production, related plants are recognized as an asset.
v Initial Cost:
Once an asset qualifies for recognition as an asset, it will be initially measured at cost. Cost
includes:
Purchase price.
· Import duties.
· Other non-refundable taxes or levies.
· Any directly attributable cost of bringing the asset to its working condition for
its intended use. Eg: Cost of site preparation, initial delivery and handling costs,
installation cost, etc.
· Administration & other general overhead expenses if they are related to the specific
fixed asset and not otherwise.
· Expenditure on start-up and commissioning of the project including the expenditure
incurred on test runs and experimental production.
CA Intermediate | Paper-1 | Advanced Accounting 181

· Initial estimate of cost of dismantling/decommissioning, removing and site restoration

cost at PRESENT VALUE. (Make a provision under AS-29 by using pre tax
discounting rate)
Items Excluded/deducted:
· Trade discounts and rebate.
· Administration and other general overhead expenses if they don’t relate to the specific
fixed asset.
· Expenditure incurred after the plant has begun commercial production.
· Expenses incurred between the dates of a project are ready to commence commercial
production and the date at which commercial production actually begins.
· Inauguration cost for opening new business
· Advertisement and Promotion expenses
Recognition of cost in the carrying amount of PPE ceases when the item is in the
location and condition necessary for it to be capable of operating in manner
intended by management. Following costs are not included in carrying amount:
· Costs incurred while an item capable of operating in manner intended by
management has yet to be brought into use or is operated less than full capacity
· Initial operating losses
· Cost of relocating or reorganizing part or all of the operations of the enterprise
v Subsequent Cost:
The enterprise does not recognize in the carrying amount of an item of PPE the cost of day
to day servicing of the item.
If any subsequent cost which increased either the capacity of the asset or capability
(efficiency) of the asset or it results in saving in cost then it should be capitalized otherwise
it will be charged to profit and loss account.
Sometimes performing regular major inspections for faults or overhaul cost may be a
condition of continuing to operate the asset; then such costs are capitalized
regardless whether parts of the item is replaced or not. (e.g. Ship, Aircraft)
Any remaining carrying amount of the previous inspection or overhaul is derecognized.
NOTE: De recognition of the carrying amount occurs regardless of whether the cost of the
previous part / inspection was identified in the transaction in which the item was acquired
or constructed.
v Self Constructed Fixed Assets: (Due to In house Efforts)
While computing the gross value of self-constructed fixed assets, same principles
are applied as in case of other specified fixed assets like the cost of construction that
relate directly to the specific asset are added to the gross value along with other general
cost which can be allocated to the specific asset are also added. Any internal profits are
eliminated in arriving at such computed costs.

Bearer plants are treated in a manner similar to constructed asset. The cultivation activities
are equated to construction activities.
Cost of self-constructed fixed assets includes the following:
· All costs which are directly related to specific asset.
· All costs that are attributable to the construction activity should be allocated to the specific
assets.
· Any internal profit included in the cost should be eliminated.
Bearer plants are accounted for in the same way as self constructed item of PPE.
v Exchange of Assets:
BASIC RULE:
Cost of an asset acquired in exchange for another asset, should be measured at the fair
value of the asset given up unless the fair value of the asset received is more clearly evident.
EXCEPTION:
In following cases, the cost of the asset is not measured at fair value if
1. the exchange transaction lacks commercial substance or
2. neither fair value of the asset given up nor asset received cannot be measure reliably.
For above (1) & (2) cost of the measured at the carrying amount of the asset given up less
amount received in cash, if any.
Where, Commercial Substance of a transaction should be determined by considering
whether reporting entity’s future cash flows are expected to change as a result of the
transaction or not. If future cash flows are expected to change as a result of exchange of
the asset, then we can say that the transaction has commercial substance and cost of the
asset is measured by applying basic rule.
If future cash flows are not expected to change as a result of exchange of the asset, then we
can say that the transaction lacks commercial substance and cost of the asset is measured
by applying exceptional rule.
v Measurement after recognition:
v Revaluation of Fixed Assets:

a. When a fixed asset is revalued, an entire class of assets should be revalued or the selection
of assets which are to be revalued should be done on a systematic basis.
Note: Where class of PPE is a grouping of assets of a similar nature and use in operations of
an enterprise.

b. To use this model fair values must be reliably measurable. The revaluation of a class of assets
should not result in the net book value of that class being greater than the recoverable
amount of assets of that class. Recoverable amount means Value in Use or Net Selling Price
whichever is Higher.
c. When a fixed asset is revalued upwards, any accumulated depreciation existing at the date
of the revaluation should not be credited to the profit and loss account.
d. Selective revaluation of assets can lead to unrepresentative amounts being reported in
financial statements. Accordingly, when revaluations do not cover all the assets of a given
class, selection of assets to be revalued should be done on a systematic basis.
e. The revalued assets can be presented in the financial statements in any of the following two
manners:
i. The gross carrying amount is adjusted in a manner consistent with the revaluation of
the carrying amount of the asset.
ii. The accumulated depreciation is eliminated against the gross carrying amount of the
asset
f. The frequency of revaluation depends upon the changes in the fair value of the item of PPE.
It may be necessary to revalue the item only every 3 or 5 years. k Accounting treatment
of revaluation:
First time revaluation (upward):
Increase in net book value is credited to owner’s interest under the head “Revaluation
Reserve”.
First time revaluation (downward):
Decrease in net book value is charged to the Profit & Loss account.
First revaluation (downward) subsequent revaluation (upward):
· Decrease in net book value is charged to Profit & Loss Account in the year in which downward
revaluation was done.
· Amount of revaluation that can be credited to Profit & Loss Account is restricted to the
amount of devaluation earlier written off. Balance amount of revaluation should be credited
to revaluation reserve.
First revaluation (upward) subsequent revaluation (downward):
· Increase in the net book value is credited to owner’s interest under the head
“Revaluation Reserve”.
· Amount of devaluation can be charged to revaluation reserve to the extent the
revaluation reserve earlier credited is unutilized, the balance amount of devaluation is
charged to the profit and loss account.
NOTE:
An enterprise may transfer the amount of difference between
Ø The depreciation based on revalued carrying amount and

Ø The depreciation based on original cost

from revaluation reserve to REVENUE RESERVES.
· If any revalued fixed asset is derecognized, revaluation surplus, if any should be transferred
to REVENUE RESERVES.
· All transfers from revaluation surplus to the revenue reserves are made directly and
not routed through profit and loss account.
v Changes in existing decommissioning, restoration and other liabilities:
The cost of the asset includes present value of estimated dismantling cost and for that we
made a provision. Sometimes such estimate may change and such changes are accounted
as follow:
COST MODEL:
Ø The changes in liability should be added or deducted from the book value of the asset in the
year in which changes are made.
Ø But decrease in liability should not exceed the carrying amount. If exceeds then such excess
amount should be credited to Profit and Loss account.
Ø If there is an increase in liability, then it should be added in the book value of the asset. But
we should ensure that the revised book value should not exceed the recoverable amount. If
exceeds, then such exceed amount should be charged to Profit & Loss account. (Because as
per AS-28, impairment losses are recognized when carrying amount of the asset is higher
than recoverable amount.)
Ø Depreciation should be provided with prospective effect.
REVALUATION MODEL:
Ø The changes in liability are treated in the same way as revaluation increase or decrease.
Ø A decrease in a liability directly credited to revaluation reserve, if any. If there is no balance
of revaluation reserve on the date of change then decreased amount directly credited to
Profit & Loss account.
Ø In the event that a decrease in the liability exceeds the carrying amount that would have
been recognized had the asset been carried under the cost model the excess should be
immediately charged to profit & loss account.
Ø An increase in the liability adjusted against the balance of the revaluation reserve and any
excess amount is debited to statement of profit and loss account.
v Retirement & Disposals:
a. An item of fixed asset is eliminated from the financial statements on disposal.
b. Items of fixed assets that have been retired from active use and are held for disposal
are stated at the lower of their net book value and net realizable value and are shown
separately in the financial statements. An expected loss is recognized immediately in
the profit and loss statement.

c. As per historical cost accounting, gains or losses arising on disposal are generally
recognized in the profit and loss statement.
v Valuation of Fixed Assets in Special Cases:
a. Hire Purchase basis : Fixed assets acquired on hire purchase basis should be recorded at their
cash purchase price. If the cash purchase price is not readily available then it should be
calculated by assuming an appropriate interest rate.
b. Jointly held: Where an enterprise owns fixed assets jointly with others (otherwise than
as a partner in a firm), the extent of its share in such assets, and the proportion in the
original cost, accumulated depreciation, and written down value is stated in the balance
sheet. Alternatively, the pro rata cost of such jointly owned assets is grouped together with
similar fully owned assets. Details of such jointly owned assets are indicated separately in
the fixed assets register.
c. Consolidated Price: Where several assets are purchased for a consolidated price,
the consideration is apportioned to the various assets on a fair basis as determined by
competent valuers.
v Definitions:
1. Depreciation : Depreciation is the systematic allocation of depreciation amount of an
asset over its useful life. It is a measure of the wearing out, consumption or other
loss of value of a depreciable arising from use, effluxion of time or obsolescence
through technology and market changes. Depreciation is allocated so as to charge
a fair proportion of the depreciable amount in each accounting period during the
expected useful life of the asset. Depreciation includes amortization of asset
whose useful life is predetermined.
2.
Depreciable Assets: Depreciable assets are assets which have the following
characteristics: Are expected to be used during more than one accounting period.
Have a limited useful life.
Are held by an enterprise for use in the production or supply of goods and services for
rental to others, or for administrative purposes and not for the purpose of sale in the
ordinary course of business.
3. Useful life: It is either: The period over which a depreciable asset is expected to be used
by the enterprise
OR
The number of production or similar units expected to be obtained from the use of the
asset by the enterprise.
4. Depreciable Amount: Depreciable amount of a depreciable asset is its historical cost
or other amount substituted for historical cost in the financial statements less its
residual value.

v Factors which are significant while making assessment of Depreciation & the amount
charged in respect thereof :
1. Historical cost or other amount substituted for the historical cost of the depreciable
asset when the asset has been revalued.
2. Expected useful life of the depreciable asset.
3. Estimated residual value of the depreciable asset.
v Factors which determine the Useful Life of a Depreciable Asset:
i. Pre-determined by legal or contractual limits such as the expiry dates of related
leases.
ii. Directly governed by extraction or consumption.
iii. Dependent on the extent of use and physical deterioration on account of wear and
tear which again depends on operational factors such as the number of shifts for
which the asset is to be used, repair and maintenance policy of the enterprise.
iv. Reduced by obsolescence arising from such factors as:
· Technological changes.
· Improvement in production methods.
· Change in market demand for the product or service output of the asset.
· Legal or other restrictions.
v Addition or Extension to an Existing Asset:
Each part of an item of PPE with a cost that is significant in relation to the total cost of the
item should be depreciated separately. E.g. it may be appropriate to depreciate separately
the airframe and engines of an aircraft.
v Factors which determine the Residual Value of the Asset:
Often determination of residual value of an asset is an intricate task. However, if such value
is insignificant it is considered as “Nil”. But on the contrary if the value is significant, it is
estimated at the time of acquisition/installation or at the time of subsequent revaluation
of the asset. The factor which play a pivotal role for determining the residual value are as
under:
The realizable value of similar assets which have reached the end of their useful lives and
have operated under conditions similar to those in which the asset will be used.
v Estimated residual/scrap value of depreciable assets:
It is estimated value of depreciable assets at the end of its useful life. It is generally difficult
to determine the residual value. It is estimated at the time of acquisition, installation and
at the time of revaluation of assets.
The change in expected useful life and residual value is accounted as a change in
accounting estimate as per AS-5.
v Method of Depreciation:
Depreciation charge should be stopped on the occurrence of any of the events

Ø Asset is retired from active use and held for disposal

Ø Asset is derecognized
A variety of depreciation methods can be used. Methods includes
Ø Straight Line Method
Ø Written Down Value Method
Ø Production Unit Method
Ø Sum of years digit method
Ø Any method which clearly reflects the pattern of consumption.
v Depreciation as per Schedule II of the Companies Act’2013:
As per the schedule the depreciation to be charged on the basis of the useful life of the
assets.
This schedule prescribes the useful life of the tangible assets and if company estimates the
useful life of the tangible asset different than the prescribed useful life in Schedule II, it has
to make disclosure with justification in the financial statements.
Schedule II also prescribes the transitional provisions as under:
From the date this schedule comes into effect, the carrying amount of the asset as on that
Rate:
a. Shall be depreciated over the remaining useful life of the asset as per this schedule.
b. After retaining the residual value, shall be recognized in the opening balance
of retained earnings where the remaining useful life of an asset is nil.
v Change in Depreciation Method:
Ø Depreciation method has to be reviewed at least at each balance sheet date.
Ø ANY CHANGE IN METHOD OF DEPRECIATION SHOULD BE ACCOUNTED AS CHANGE
IN ACCOUNTING ESTIMATE PROSPECTIVELY AS PER AS-5.
Impairment:
To determine whether an item of PPE is impaired, an enterprise applies AS-28.
· Transition Provisions:
Ø Where an entity recorded an expenses in Profit & Loss account, which is eligible
to be included in cost of the asset as per AS-10 PPE, then it should be recorded
RETROSPECTIVELY NET OF TAX in revenue reserves. (e.g. Now provision for dismantling
cost is added in cost of the asset)
Journal Entry: Asset A/c Dr.
To Revenue Reserves
Ø The requirement of recognition of an item of PPE in an exchange of the asset should
be applied PROSPECTIVELY after this standard becomes mandatory.
Ø The requirement regarding the revaluation model should be applied

PROSPECTIVELY.
DISCLOSURE:
Ø The measurement basis (cost model or revaluation model)
Ø The depreciation method
Ø The useful life or depreciation rate
Ø The gross carrying amount and accumulated depreciation at the beginning and at the
end of the period
Ø A reconciliation of the carrying amount at the beginning and end of the period

CLASS WORK
Q-1 Entity A, a supermarket chain, is renovating one of its major stores. The store will have
more available space for in store promotion outlets after the renovation and will include a
restaurant. Management is preparing the budgets for the year after the store reopens, which
include the cost of remodelling and the expectation of a 15% increase in sales resulting from
the store renovations, which will attract new customers. State whether the remodelling
cost will be capitalised or not.
Sol. The expenditure in remodelling the store will create future economic benefits (in the form
of 15% of increase in sales) and the cost of remodelling can be measured reliably, therefore,
it should be capitalised.
Q-2 Entity A has an existing freehold factory property, which it intends to knock down and
redevelop. During the redevelopment period the company will move its production facilities
to another (temporary) site. The following incremental costs will be incurred:
1. Setup costs of ` 5,00,000 to install machinery in the new location.
2. Rent of ` 15,00,000
3. Removal costs of ` 3,00,000 to transport the machinery from the old location to the
temporary location.
Can these costs be capitalised into the cost of the new building?
Sol. Constructing or acquiring a new asset may result in incremental costs that would have been
avoided if the asset had not been constructed or acquired. These costs are not to be included
in the cost of the asset if they are not directly attributable to bringing the asset to the
location and condition necessary for it to be capable of operating in the manner intended
by management. The costs to be incurred by the company are in the nature of costs of
relocating or reorganising operations of the company and do not meet the requirement of
AS 10 (Revised) and therefore, cannot be capitalised.
Q-3 Entity A, which operates a major chain of supermarkets, has acquired a new store location.
The new location requires significant renovation expenditure.
Management expects that the renovations will last for 3 months during which the
supermarket will be closed.
Management has prepared the budget for this period including expenditure related to
construction and remodelling costs, salaries of staff who will be preparing the store before
its opening and related utilities costs. What will be the treatment of such expenditures?
Sol. Management should capitalise the costs of construction and remodelling the supermarket,
because they are necessary to bring the store to the condition necessary for it to be
capable of operating in the manner intended by management. The supermarket cannot be
opened without incurring the remodelling expenditure, and thus the expenditure should be
considered part of the asset.
However, if the cost of salaries, utilities and storage of goods are in the nature of operating

expenditure that would be incurred if the supermarket was open, then these costs are not
necessary to bring the store to the condition necessary for it to be capable of operating in
the manner intended by management and should be expensed.
Q-4 An amusement park has a 'soft' opening to the public, to trial run its attractions.
Tickets are sold at a 50% discount during this period and the operating capacity is 80%. The
official opening day of the amusement park is three months later.
Management claim that the soft opening is a trial run necessary for the amusement park
to be in the condition capable of operating in the intended manner.
Accordingly, the net operating costs incurred should be capitalised. Comment.
Sol. The net operating costs should not be capitalised but should be recognised in the Statement
of Profit and Loss.
Q-5 Entity A exchanges land with a book value of ` 10,00,000 for cash of ` 20,00,000 and plant
and machinery valued at ` 25,00,000. What will be the measurement cost of the assets
received. (Consider that the transaction has commercial substance)?
Sol. In the given case, Plant & Machinery is valued at ` 25,00,000, which is assumed to be fair
value in absence of information. Further, since fair value of land (asset given up) is not
given, the transaction will be recorded at fair value of assets acquired of ` 45,00,000 (` Cash
20,00,000 + ` Plant & Machinery 25,00,000). Since land of book value ` 10,00,000 is transferred
in exchange of assets worth ` 45,00,000, a gain of ` 35,00,000 will be recognised in the books
of Entity A.
The following journal entry will be passed in the books of Entity A:
Cash/ Bank A/c Dr. 20,00,000
Plant & Machinery A/c Dr. 25,00,000
To Land 10,00,000
To Profit on Sale of Land (balancing figure) 35,00,000
Q-6 What happens if the cost of the previous part/inspection was/ was not identified in the
transaction in which the item was acquired or constructed?
Sol. De-recognition of the carrying amount occurs regardless of whether the cost of the
previous part/inspection was identified in the transaction in which the item was acquired
or constructed.
Q-7 What will be your answer in the above question, if it is not practicable for an enterprise to
determine the carrying amount of the replaced part/inspection?
Sol. It may use the cost of the replacement or the estimated cost of a future similar inspection
as an indication of what the cost of the replaced part/existing inspection component was
when the item was acquired or constructed.
Q-8 Entity A has a policy of not providing for depreciation on PPE capitalised in the year until
the following year, but provides for a full year's depreciation in the year of disposal of an
asset. Is this acceptable?

Sol. The depreciable amount of a tangible fixed asset should be allocated on a systematic basis
over its useful life. The depreciation method should reflect the pattern in which the asset's
future economic benefits are expected to be consumed by the entity.
Useful life means the period over which the asset is expected to be available for use by the
entity. Depreciation should commence as soon as the asset is acquired and is available for
use. Thus, the policy of Entity A is not acceptable.
Q-9 Entity A purchased an asset on 1st January 20X1 for ` 1,00,000 and the asset had an estimated
useful life of 10 years and a residual value of nil.
On 1st January 20X5, the directors review the estimated life and decide that the asset will
probably be useful for a further 4 years.
Calculate the amount of depreciation for each year, if company charges depreciation on
Straight Line basis.
Sol. The entity has charged depreciation using the straight-line method at ` 10,000 per annum
i.e (1,00,000/10 years).
On 1st January 20X5, the asset's net book value is [1,00,000 – (10,000 x 4)] ` 60,000.
The remaining useful life is 4 years.
The company should amend the annual provision for depreciation to charge the unamortised
cost over the revised remaining life of four years.
Consequently, it should charge depreciation for the next 4 years at ` 15,000 per annum i.e.
(60,000 / 4 years).
Q-10 Entity B constructs a machine for its own use. Construction is completed on 1st November
20X1 but the company does not begin using the machine until 1st March 20X2. Comment.
Sol. The entity should begin charging depreciation from the date the machine is ready for use
– that is, 1st November 20X1. The fact that the machine was not used for a period after it
was ready to be used is not relevant in considering when to begin charging depreciation.
Q-11 A property costing ` 10,00,000 is bought in 20X1. Its estimated total physical life is 50 years.
However, the company considers it likely that it will sell the property after 20 years.
The estimated residual value in 20 years' time, based on 20X1 prices, is:
Case (a) ` 10,00,000
Case (b) ` 9,00,000.
Calculate the amount of depreciation.
Sol.
Case (a)
The company considers that the residual value, based on prices prevailing at the balance
sheet date, will equal the cost.
There is, therefore, no depreciable amount and depreciation is correctly zero.
Case (b)
The company considers that the residual value, based on prices prevailing at the balance

sheet date, will be ` 9,00,000 and the depreciable amount is, therefore, ` 1,00,000.
Annual depreciation (on a straight-line basis) will be ` 5,000 [{10,00,000 –
9,00,000} ÷ 20].
Q-12 Entity B manufactures industrial chemicals and uses blending machines in the production
process. The output of the blending machines is consistent from year to year and they can
be used for different products.
However, maintenance costs increase from year to year and a new generation of machines
with significant improvements over existing machines is available every 5 years. Suggest
the depreciation method to the management.
Sol. The straight-line depreciation method should be adopted, because the production output is
consistent from year to year.
Factors such as maintenance costs or technical obsolescence should be considered in
determining the blending machines’ useful life.
Q-13 Entity A carried plant and machinery in its books at ` 2,00,000. These were destroyed in a
fire. The assets were insured 'New for old' and were replaced by the insurance company with
new machines that cost ` 20,00,000. The machines were acquired by the insurance company
and the company did not receive ` 20,00,000 as cash compensation. State, how Entity A
should account for the same?
Sol. Entity A should account for a loss in the Statement of Profit and Loss on derecognition of
the carrying value of plant and machinery in accordance with AS 10 (Revised).
Q-14 An entity gave the following Note in its Financial Statements:
‘The company chooses not to charge depreciation on Property, Plant and Equipment on
account of:
(a) Annual Maintenance Contracts being expensed thereby ensuring timely repairs of
Plant and Machinery.
(b) Depreciation being a non-cash expense has no impact on cash flows.
Accordingly, it is not necessary to depreciate an asset when repairs and maintenance
charges are expensed in the Statement of Profit and Loss.
(c) The values of certain assets like Property increase with passage of time, and hence
charging depreciation does not make sense.
(d) At the end of the useful life, the asset is ultimately sold, and since the asset is at cost
due to no depreciation, exact profit or loss on sale of the asset is stated.’
Sol. Depreciation refers to writing off the value of the asset over its useful life.
Such write-off is necessitated on account of normal wear-and-tear, usage, or obsolescence.
Since items of Property, Plant and Equipment are generally used in generating revenue,
the pro-rated write-off in value of such item should be recorded in the books against the
income earned by such an asset.

Providing depreciation is mandatory, in spite of the fact that repairs are expensed in the
Statement of Profit and Loss, or the value of the Property is appreciating. Depreciation is a
systematic allocation of cost of the asset against the income generated from the continued
use of the asset. Further, the Companies Act, 2013 mandates depreciation to be charged in
order to determine the correct profits. Thus, not charging depreciation would result in non-
compliance with the Companies Act provisions as well.
The argument laid down by the company and the reasons for the same being invalid are
discussed below.
(a) Annual Maintenance Contracts being expensed thereby ensuring timely repairs of
Plant and Machinery:
The fact that the company enters into Annual Maintenance Contracts for timely repairs
can be regarded as a running cost. Such expense is incurred in order to ensure that the
machine continues to run as intended. Thus, it implies that because the machine is
being utilized, it will need regular repairs. In other words, continuous use is resulting
in normal wear-and-tear which is the reason why depreciation should be charged by
the company. By stating that the company incurs Annual Maintenance Expenses, the
company is recording only the ’maintenance expenses’, but not the wear-and-tear
requiring the maintenance in the first place. Hence, this argument put forth by the
company is not valid.
(b) Depreciation being a non-cash expense has no impact on cash flows.
Accordingly, it is not necessary to depreciate an asset when repairs and maintenance
charges are expensed in the Statement of Profit and Loss.
When viewed from the prism of depreciation alone, it appears that the fact that
depreciation is a non-cash item is correct. However, it must be noted that at the
time of procurement of the asset, the company would have paid cash. Depreciation is
after all writing off this amount over the life of the asset. Hence the argument that
depreciation is a non-cash item is not valid. Depreciation is writing off the cost of
the asset (which was already paid for) over the useful life of the asset, and hence is
mandatory.
(c) The values of certain assets like Property increase with passage of time, and hence
charging depreciation does not make sense.
Certain assets like immovable property do increase in value with the passage of time.
However, such assets are ‘used for the purposes of business’ and are not ‘held for sale’
or held as investment property. Accordingly, since the asset is being used for carrying
on business, providing depreciation will give a true and fair view of the results of the
company, and hence the argument that the value of the property appreciates is not
valid.

If the company wants to show the fair market value of the PPE, then it has the option
to apply Revaluation model. However, depreciation is mandatory to be charged in
Revaluation model also.
(d) At the end of the useful life, the asset is ultimately sold, and since the asset is at cost
due to no depreciation, exact profit or loss on sale of the asset is stated.’
The value of any asset, after usage, will reduce. Accordingly, the argument that the
‘exact profit or loss on sale of the asset’ will be obtained is incorrect. Due to usage of
the asset, the value of the asset would be lower than the cost. Charging depreciation
would seek to bring the book value approximating to such reduced value. Thereafter,
on sale of the asset, the true profit or loss would be available.
Accordingly, this argument is also invalid.
It may be pertinent to note that Accounting Standard 1, Disclosure of Accounting Policies
states that Disclosure of accounting policies or of changes therein cannot remedy a wrong
or inappropriate treatment of the item in the accounts. In other words, the company cannot
be absolved of the fact that it has not complied with the relevant accounting standards
merely by giving a disclosure of incorrect policies or practices being followed.
Thus, the company’s stand of disclosing the incorrect policy as a remedy is not correct. The
company is suggested to charge depreciation on a systematic basis over the useful life of
the asset thereby complying with the Accounting Standards.
Q-15 With reference to AS-10 Revised, classify the items under the following heads:
HEADS
(i) Purchase Price of Property, plant and Equipment (PPE)
(ii) Directly attributable cost of PPE or
(iii) Cost not included in determining the carrying amount of an item of PPE.
ITEMS
(1) Import duties and non-refundable purchase taxes.
(2) Initial delivery and handling costs.
(3) Initial operating losses, such as those incurred while demand for the output of an
item builds up.
(4) Costs incurred while an item capable of operating in the manner intended by
management has yet to be brought into use or is operated at less than full capacity.
(5) Trade discounts and rebates.
(6) Costs of relocating or reorganizing part or all of the operations of an enterprise.
(7) Installation and assembly costs.
(8) Administration and other general overhead costs.
Q-16 ABC Ltd. is installing a new plant at its production facility. It has incurred these costs:
1. Cost of the plant (cost per supplier's invoice plus taxes) `25,00,000
2. Initial delivery and handling costs `2,00,000

3. Cost of site preparation `6,00,000

4. Consultants used for advice on the acquisition of the plant `7,00,000
5. Interest charges paid to supplier of plant for deferred credit `2,00,000
6. Estimated dismantling costs to be incurred after 7 years `3,00,000
7. Operating losses before commercial production `4,00,000
Please advise ABC Ltd. on the costs that can be capitalised in accordance with AS 10 (Revised).
Q-17 Arka Ltd. purchased machinery for ` 3,000 lakhs. Depreciation was charged at 10% on SLM
basis for a useful life of 10 years. At the end of Year 4, the machinery was revalued to ` 2,700
lakhs and the same was adopted. What will be the carrying amount of the asset at the end
of Year 5 and Year 6? Assume no change in the useful life.
Q-18 Skanda Ltd. acquired a machinery for ` 2,50,00,000 five years ago.
Depreciation was charged at 10% p.a. on SLM basis, useful life being 10 years.
At the beginning of Year 3, the machinery was revalued to ` 3,00,00,000 with the surplus on
revaluation being credited to Revaluation Reserve. Depreciation was provided on the revalued
amount over the balance useful life of 8 years. The machinery was sold in the current year
for ` 1,12,50,000. Give the accounting treatment for the above in the Company’s accounts.
What will be the treatment if the machinery fetched only ` 42,50,000 now?
Q-19 Akshar Ltd. installed a new Plant (not a qualifying asset), at its production facility, and
incurred the following costs:
 Cost of the Plant (as per supplier’s invoice): ` 30,00,000
 Initial delivery and handling costs: ` 1,00,000
 Cost of site preparation: ` 2,00,000
 Consultant fee for advice on acquisition of Plant: ` 50,000
 Interest charges paid to supplier against deferred credit: ` 1,00,000
 Estimate of Dismantling and Site Restoration costs: ` 50,000 after 10 years (Present
Value is ` 30,000)
 Operating losses before commercial production: ` 40,000
The company identified motors installed in the Plant as a separate component and a cost
of ` 5,00,000 (Purchase Price) and other costs were allocated to them proportionately. The
company estimates the useful life of the Plant and those of the Motors as 10 years and 6
years respectively and SLM method of Depreciation is used.
At the end of Year 4, the company replaces the Motors installed in the Plant at a cost of
` 6,00,000 and estimated the useful life of new motors to be 5 years. Also, the company
revalued its entire class of Fixed Assets at the end of Year 4. The revalued amount of Plant
as a whole is ` 25,00,000. At the end of Year 8, the company decides to retire the Plant from
active use and also disposed the Plant as a whole for ` 6,00,000.
There is no change in the Dismantling and Site Restoration liability during the period of use.
You are required to explain how the above transaction would be accounted in accordance
with AS 10.
Q-20
Bharat Infrastructure Ltd. acquired a heavy machinery at a cost of ` 1,000 lakhs, the
breakdown of its components is not provided. The estimated useful life of the machinery is
10 years. At the end of Year 6, the turbine, which is a major component of the machinery,
needed replacement, as further usage and maintenance was uneconomical. The remainder
of the machine is in good condition and is expected to last for the remaining 4 years. The
cost of the new turbine is ` 450 lakhs. Give the accounting treatment for the new turbine,
assuming SLM Depreciation and a discount rate of 8%.
Q-21
Preet Ltd. intends to set up a steel plant, for which it has acquired a dilapidated factor
having an area of 5,000 acres at a cost of ₹ 60,000 per acre. Preet Ltd. has incurred ` 1.10
crores on demolishing the old Factory Building thereon. A sum of ` 63,00,000 (including
5% GST thereon) was realized from the sale of material salvaged from the site. Preet Ltd.
incurred Stamp Duty and Registration Charges of 7% of land value, paid legal and consultancy
charges ` 8,00,000 for land acquisition and incurred ` 1,25,000 on title guarantee insurance.
Compute the value of the land acquired.
Q-22 A company is engaged in the manufacture of electronic products and systems. As per chief
accountant a prototype system was installed at one of the customer’s locations in
June,2016 for getting acceptance on the performance of the system. The chief accountant
has stated that as the ownership of the system installed for field trials was vested with
the company, for accounting and control purposes, the prototype system installed
at customer’s location in 2016 was capitalized in the accounts for the year 2016-17
at its bought out cost. State whether the accounting treatment adopted by the company
is correct or not?
Sol.
· As per AS-2, inventories means assets held for sale in the ordinary course of business, or in
the process of production for such sale, or for consumption in the production of goods or
services for sale, including maintenance supplies and consumables other than machinery
spares.
· And as per AS-10, fixed asset is an asset held with the intention of being used for the
purpose of producing or providing goods or services and is not held for sale in the normal
course of business.
· Accordingly, the system installed by the company at customer’s site for his acceptance,
based on the field trials of the system, is an item of inventory, and is not a fixed asset.
Installation of such prototype system at customer’s sites for their acceptance is akin to
sale of goods on approval basis. Therefore, the capitalization of such prototype system at
its bought-out-cost is not correct.
· At the time of installation of such systems at the customer’s site value of the same should
be transferred to a separate account such as “Goods sent for approval account”.

Q-23 A company is in the process of setting up a production line for manufacturing a new product.
Based on trial runs conducted by the company, it was noticed that the production
lines output was not of the desired quality. However, company has taken a decision to
manufacture and sell the sub-standard product over the next one year due to the huge
investment involved. In the background of the relevant accounting standard, advice the
company on the cut-off date for capitalization of the project cost.
Sol. As per provisions of AS-10, expenditure incurred on start-up and commissioning of the
project, including the expenditure incurred on test runs and experimental production, is
usually capitalized as an indirect element of the construction cost. However, the expenditure
incurred after the plant has begun commercial production i.e production intended for sale or
captive consumption, is not capitalized and is treated as revenue expenditure even though
the contract may stipulate that the plant will not be finally taken over until after the
satisfactory completion of the guarantee period.
In the present case, the company did stop production even if the output was not of the
desired quality, and continued the sub-standard production due to huge investment involved
in the project. Capitalization should cease at the end of the trial run, since the cutoff date
would be the date when the trial run was completed.
Q-24 Southern Tower Ltd. Purchased a plant from M/s Tatamaco Ltd. On 30.09.2016 with a
quoted price of ` 180 lakhs. Tatamaco offer 3 months credit with a condition that discount
of 1.25% will be allowed if the payment were made within one month. VAT is 12.5% of the
quoted price. Company incurred 2% on transportation costs and 3% on erection costs
of the quoted price. Pre-operative cost amount to ` 1.5 lakhs. To finance the purchase of
the machinery, company took a term loan of ` 125 lakhs at an interest rate of 14.5% p.a. The
machine was ready for use on 31.12.2016. However, it was put to use only on 01.04.2017.
Find out the original cost. & suggest the accounting treatment for the cost incurred
during the period between the date the machine was ready for use and the actual date the
machine was put to use.
Sol.
i. Original Cost of the machine:
Particulars ` in lakhs ` in lakhs
Quoted Price 180.00
Less: Discount @ 1.25% - 180
Add: VAT @12.5% 22.50
Transportation @ 2% 3.6
Erection Cost @3% 5.4
Pre-operative cost 1.5
Finance Cost (14.5% of Rs 125 lacs for 4.53
the period 01.10.16 to 31.12.16)*

Total 217.53

*Note-:
(i) It is assumed that asset is a qualifying asset under AS-16. Although normally a qualifying
asset is an asset that takes substantial period of time to get ready for its intended use,
however, in the suggested answers given by ICAI in the past, even less than 12 months
interest has been capitalized in similar examination questions.
(ii) Cost incurred during the period between the date the machine was ready for use and the
actual date the machine was put to use.
Finance Cost amounting ` 4.53 lakhs (14.5% on ` 125 lakhs for the period 01.01.2017 to
31.03.2017) will be charged to profit and loss account as per AS-16.
Q-25 J Ltd. Purchased Machinery from K Ltd on 31.08.2016. Quoted price was ` 275 lakhs. The
vendor offers 2% Trade discount. Sales tax on quoted price is 6%. J Ltd spent `60,000 for
transportation and ` 45,000 for architect’s fees. They borrowed money from HDFC Bank of `
250 lakhs for acquisition of asset @15% p.a. They also spent ` 15,000 for material, ` 10,000
for labour and ` 4,000 as overheads during trial run of the machine. The machine was
ready for use on 15.01.2017 but it was put to use on 15.03.2017. Find out the original cost
of the machine. Also suggest the accounting treatment for costs incurred between
the date the machine was ready for use and the date at which it was actually put
to use.
Sol.
Computation of cost of Machine Amount (` lakhs)
Quote Price (less trade discount) 269.50
Add: Sales Tax @ 6% (Note 1) 16.17
Add: Transportation Cost 0.60
Add: Architect Fees 0.45
Add: Trial Run Expenses 0.29
Add: Borrowing Cost for the period 31.08.2016 to 14.06
15.01.2017 (Note-2) (250*15%*4.5/12)
301.07
As per AS-10, expenses incurred between the date a project is ready to commence commercial
production and the date at which commercial production actually begins are charged to revenue
and are not capitalized. Accordingly, the cost incurred during the period 15.01.2017 to 15.03.2017
will be expensed off.
Note-1: It is assumed that Sales Tax will be levied on Quoted Price after deducting Trade Discount.
Note-2: It is assumed that asset is a qualifying asset under AS-16. Although normally a qualifying
asset is an asset that takes substantial period of time to get ready for its intended use, however,
in the suggested answers given by ICAI in the past, even less than 12 months interest has been
capitalized in similar examination questions.
Q-26 Purchase Price of Plant & Machinery (including GST of Rs. 5,00,000 for which credit is
available) = Rs. 25,00,000 Transportation Cost = Rs. 3,00,000 Professional fees for acquiring
the asset = Rs. 2,00,000 Estimated dismantling cost to be incurred at the end of 10th year
= Rs. 7,50,000 Pre tax discounting rate = 12% Tax Rate = 30% Find out the cost of the asset
and pass necessary Journal entry for first 2 years.
Q-27 PQR Ltd constructed a fixed asset and incurred the following expenses on its
construction:
`
Material 16,00,000
Direct Expenses 3,00,000
Direct Labour (1/15th of the total labour time 6,00,000
was chargeable to the construction)
Total Office & Administrative Expenses
(4% is specifically attributable to the 9,00,000
construction of a fixed asset)
Depreciation on assets used for the construction of fixed asset 15,000
Calculate the cost of Fixed Asset.
Sol.
`
Material 16,00,000
Direct Labour (1/15th of 6,00,000) 40,000
Total Office & Administrative Expenses (4% of 9,00,000) 36,000
Depreciation on assets used for the construction of fixed asset 15,000
Cost of fixed assets constructed 19,91,000
Q-28 V Ltd. exchanged an asset with a carrying amount of Rs. 50,000 with a new asset having
fair value of Rs. 43,000. V Ltd.’s cash flows are expected to change after exchange of the
asset. Pass necessary journal entry.
Sol. As per AS-10 Cost of an asset acquired in exchange for another asset, should be measured at
the fair value of the asset given up unless the fair value of the asset received is more clearly
evident.
If future cash flows are expected to change as a result of exchange of the asset, then we
can say that the transaction has commercial substance and cost of the asset is measured
by applying basic rule.
So, V Ltd. should record the asset at Rs. 43,000.
Journal Entry:
New Asset A/c Dr. 43000
Profit&Loss A/c Dr. 7000
To Old Asset A/c 50000

Q-29 V Ltd. exchanged an asset X with a book value Rs. 10,000 having fair value of Rs.10,800
for cash of Rs. 500 and asset Y of U Ltd. which has a fair value of Rs. 10,200. V Ltd.’s cash
flows are not expected to change as a result of the exchange transaction. Pass necessary
journal entry.
Sol. As per AS-10 Cost of an asset acquired in exchange for another asset, should be measured at
the fair value of the asset given up unless the fair value of the asset received is more clearly
evident.
In following cases, the cost of the asset is not measured at fair value if
1. the exchange transaction lacks commercial substance or
2. fair value of the asset given up or asset received cannot be measure reliably.
For above (1) & (2) cost of the measured at the carrying amount of the asset given up less
amount received in cash, if any.
If future cash flows are not expected to change as a result of exchange of the asset, then we
can say that the transaction lacks commercial substance and cost of the asset is measured
by applying exceptional rule.
So V Ltd. should use exceptional rule.
Journal Entry:
New Asset A/c Dr. 9500
Cash A/c Dr. 500
To Old Asset A/c 10000
Q-30 V Ltd. is a large manufacturing company. It owns a number of buildings , such as factory
building and office buildings. The industrial buildings are located in industrial zones,
whereas office buildings are in the centre of the city. V Ltd.’s management want to
apply the revaluation model as per AS-10 to the subsequent measurement of the
office building but continues to apply the cost model to the industrial building. State
whether this is acceptable?
Sol. V Ltd. can apply the revaluation model only to the office building. The office buildings can
be clearly distinguished from the industrial building in terms of their function, their nature
and their general location. AS-10 permits assets to be revalued on a class by class basis.
The different characteristics of the building enable them to be classified as different PPE
classes. The different measurement models can, therefore, be applied to these classes for
subsequent measurement.
All properties within the class of office buildings must be carried at revalued amount.
Adjustment of Accumulated Depreciation due to Revaluation:
1. Gross carrying amount is adjusted in a manner that is consistent with the
revaluation of the carrying amount of the asset
2. Accumulated depreciation is eliminated against the Gross carrying amount of the
asset.

Q-31 Balance sheet of U Ltd. shows following balances: Plant & Machinery Account = Rs. 2,00,000
(Debit) Provision for dismantling cost = Rs. 3,00,000 (Credit).
U Ltd. follows Cost model for recognizing Property, Plant & Equipment. Pass necessary journal
entry in following case:
I. U Ltd. estimates that additional Rs.50,000 will be incurred for dismantling cost.
Recoverable amount of the asset on that date is Rs. 3,50,000.
II. U Ltd. estimates that total estimated dismantling cost is only Rs. 2,20,000.
III. U Ltd. estimates that additional Rs. 50,000 will be incurred for dismantling cost.
Recoverable amount of the asset on that date is Rs. 2,30,000.
IV. U Ltd. estimates that total dismantling cost is only Rs. 75,000.
Q-32 Balance sheet of V Ltd. shows following balances:
Plant & Machinery Account = Rs.10,00,000 (Debit)
Provision for dismantling cost = Rs. 3,00,000 (Credit)
Revaluation Reserve Account = Rs. 2,00,000
V Ltd. follows Revaluation model for recognizing Property, Plant & Equipment. Pass necessary
journal entry if
I. V Ltd. estimates that total dismantling cost is Rs. 2,50,000
II. V Ltd. estimates that Rs. 5,75,000
Q-33 V Ltd. has a book value of the asset as on 01/04/2016 is Rs. 10,00,000. On that date V Ltd. is
decided for upward revaluation by 20%. V Ltd. follows policy that difference between the
depreciation based on revalued carrying amount and the depreciation based on original
cost transferred to revenue reserves from revaluation reserve. V Ltd. follows Straight Line
method for depreciation and remaining useful life of the asset is 10 years as on 01/04/2016.
On 01/04/2019 books of accounts of V Ltd. shows the balance of Provision for dismantling
cost is Rs. 8,50,000. On 01/04/2019 V Ltd. estimates that total dismantling cost will be Rs.
1,00,000. Pass necessary journal entry for change in estimate.
Q-34 Value Ltd. acquired a plant on 01.04.2004 for 100 lakhs. The company charges straight
line depreciation on the basis of estimated useful life of the asset as 10 years and scrap
value at the end as 2.5% of the cost. At the beginning of the 5th year, the asset was revalued
upward by 40% of the written down value and the revaluation profit was transferred to
Revaluation Reserve. While charging depreciation after revaluation, estimated remaining
useful life was assumed to be 6 years and scrap realization was expected to be 2.5%
of the revalued figure. No additional depreciation was adjusted through Revaluation
Reserve Account. At the beginning of the 8th year the company found the asset unless
and accordingly, decided to retire it. On the date of retirement the estimated realizable
value of the asset is ` 3,80,000. Ascertain the loss on retirement of the asset to be charged
to the statement of profit and loss.
Sol.

Particulars `
Original Cost 1,00,00,000
Less: SLM Depreciation up to 4th year(1,00,00,000-2,50,000/10)*4 (39,00,000)
Net book value at the end of the 4th year or at the beginning of 5th 61,00,000
year
Add: Revaluation profit (credited to Revaluation Reserve) 24,40,000
Revised Carrying Amount 85,40,000
Revised Residual Value (2.5% of 85,40,000) = 2,13,500 (41,63,250)
Less: Depreciation for 5th , 6th & 7th years(85,40,000-2,13,500/6years)*3years 43,76,750
Net book value at the end of 7th year or at the beginning of 8th year (3,80,000)
Net realizable value on the date of retirement
Loss on retirement of plant 39,96,750
Less: Revaluation Reserve (24,40,000)
Net loss charged to statement of profit and loss 15,56,750
Q-35 A company installed a plant at a cost of `20 lacs with estimated useful life of 10 years and
decided to depreciate on straight line method. In the fifth year, the company decided to
switch over from straight line method to written down value method. The depreciation rate
is 10%.Compute the resultant surplus/deficiency if any, and state how will you treat the
same in the accounts.
Sol. There will no amount of resultant surplus / deficiency as the change in depreciation method
which considered as a change in accounting estimate and therefore such change should be
accounted for prospectively.
Q-36 In the books of Optic Fiber Ltd., plant and machinery stood at ` 6,32,000
1.4.2014. However, on scrutiny it was found that machinery worth ` 1,20,000 was included
in the purchases on 1.6.2014. On 30.6.2014 the company disposed a machine having
book value of ` 1,89,000 on 1.4.2014 at ` 1,75,000 in part exchange of a new machine
costing ` 2,56,000. The company charges depreciation @ 20% WDV on plant and machinery.
You are required to calculate:
(i) Depreciation to be charged to the Profit and Loss Account.
(ii) Book value of Plant and Machinery A/c as on 31.3.2015.
(iii) Loss on exchange of machinery. (May’2015)
Sol.
(i) Depreciation to be charged in the Profit and Loss Account
Depreciation on old Machinery `
[20% on ` 6,32,000 for 3 months (01.4.14 to 30.6.14)] 31,600
Add: Depreciation machinery acquired on 01.06.2014 20,000
(` 1,20,000 x 20% x 10/12)
Depreciation on Machinery after adjustment of Exchange 1,04,850
[20% of ` (6,32,000 - 1,89,000 + 2,56,000) for 9 months]
Total Depreciation to be charged in Profit and Loss A/c 1,56,450

ii) Book Value of Plant and Machinery as on 31.03.2015

` `
Balance as per books on 01.04.2014 6,32,000
Add: Included in purchases on 01.06.2014 1,20,000
Add: Purchase on 30.06.2014 2,56,000 3,76,000
10,08,000
Less: Book value of Machine sold on 30.06.2014 (1,89,000)
8,19,000
Less: Depreciation on machinery in use(1,56,450-9,450) (1,47,000)
Book value as on 31.03.2015 6,72,000
(iii) Loss on exchange of Machinery
`
Book value of machinery as on 01.04.2014 1,89,000
Less: Depreciation for 3 months (9,450)
WDV as on 30.06.2014 1,79,550
Less: Exchange value (1,75,000)
Loss on exchange of machinery 4,550
Q-37 The original cost of the machine shown in the books of a company as on 1stApril,2012 is
` 180 lakhs which they revalued upward by 20% during 2012-13. In the year 2014-15, it
appears that a 5% downward revaluation should be made to arrive at the true value of the
assets in the changed economic and industry conditions. They charged 15% depreciation on
W.D.V of the assets. Show the value of the asset at which it should appear in the balance
sheet dated 31stMarch, 2015
Answer: (Hint) The WDV as on 31.03.2015 is 126.02 lakhs
Q-38
S Ltd. has constructed a fixed asset and incurred the following expenses on its
construction:
`
Materials 7,00,000
Total Direct Labour (excluding the amount allocated to fixed asset 18,00,000
constructed)
(1/10th of the total labour was chargeable to the fixed asset constructed)
Total Office & Administration Expenses 1,70,000
(5% is chargeable to the fixed asset constructed)
Total Depreciation 1,90,000
(10% is chargeable to the fixed asset constructed)

Calculate the cost of the fixed asset constructed as per AS 10. (RTP,November’2015)
Answer: (Hint) Cost of fixed asset 11,07,500.
Q-39 Shrishti Ltd. contracted with a supplier to purchase machinery which is to be installed in its
Department A in three months' time. Special foundations were required for the machinery

which were to be prepared within this supply lead time. The cost of the site preparation and
laying foundations were ` 1,41,870. These activities were supervised by a technician during
the entire period, who is employed for this purpose of ` 45,000 per month. The technician's
services were given by Department B to Department A, which billed the services at ` 49,500
per month after adding 10% profit margin.
The machine was purchased at ` 1,58,34,000 inclusive of IGST @ 12% for which input credit is
available to Shrishti Ltd. ` 55,770 transportation charges were incurred to bring the machine
to the factory site. An Architect was appointed at a fee of ` 30,000 to supervise machinery
installation at the factory site.
Ascertain the amount at which the Machinery should be capitalized under AS 10 considering
that IGST credit is availed by the Shristhi Limited. Internally booked profits should be
eliminated in arriving at the cost of machine.
Q-40 In the year 2016-17, an entity has acquired a new freehold building with a useful life of 50
years for Rs.90,00,000. The entity desires to calculate the depreciation charge per annum
using a straight-line method. It has identified the following components (with no residual
value of lifts & fixtures at the end of their useful life) as follows:
Component Useful life (years) Cost
Land Infinite Rs.20,00,000
Roof 25 Rs.10,00,000
Lifts 20 Rs.5,00,000
Fixtures 10 Rs.5,00,000
Remainder of building 50 Rs.50,00,000

Rs.90,00,000
You are required to calculate depreciation for the year 2016-17 as per componentization
method.
Q-41 ABC Ltd is setting up a new refinery outside the city limits. In order to facilitate the
construction of the refinery and its operations, ABC Ltd. is required to incur expenditure on
the construction/development of railway siding, road and bridge. Though ABC Ltd. incurs the
expenditure on the construction/development, it will not have ownership rights on these
items and they are also available for use to other entities and public at large. Can ABC Ltd.
capitalize expenditure incurred on these items as property, plant and equipment (PPE)?
Ans. AS 10 states that the cost of an item of property, plant and equipment shall be recognized
as an asset if, and only if:
(a) it is probable that future economic benefits associated with the item will flow to the
entity; and
(b) the cost of the item can be measured reliably.
Further, the standard provides that the standard does not prescribe the unit of measure for
recognition, i.e., what constitutes an item of property, plant and equipment. Thus, judgement

is required in applying the recognition criteria to an entity’s specific circumstances. The

cost of an item of property, plant and equipment comprise any costs directly attributable to
bringing the asset to the location and condition necessary for it to be capable of operating
in the manner intended by management.
In the given case, railway siding, road and bridge are required to facilitate the construction
of the refinery and for its operations. Expenditure on these items is required to be incurred in
order to get future economic benefits from the project as a whole which can be considered
as the unit of measure for the purpose of capitalization of the said expenditure even though
the company cannot restrict the access of others for using the assets individually. It is
apparent that the aforesaid expenditure is directly attributable to bringing the asset to the
location and condition necessary for it to be capable of operating in the manner intended
by management.
In view of this, even though ABC Ltd. may not be able to recognize expenditure incurred on
these assets as an individual item of property, plant and equipment in many cases (where
it cannot restrict others from using the asset), expenditure incurred may be capitalized as
a part of overall cost of the project. From this, it can be concluded that, in the given case
the expenditure incurred on these assets, i.e., railway siding, road and bridge, should be
considered as the cost of constructing the refinery and accordingly, expenditure incurred on
these items should be allocated and capitalized as part of the items of property, plant and
equipment of the refinery.
Q-42 A Ltd. has an item of plant with an initial cost of ` 1,00,000. At the date of revaluation,
accumulated depreciation amounted to ` 55,000. The fair value of the asset, by reference to
transactions in similar assets, is assessed to be ` 65,000.
Pass Journal Entries with regard to Revaluation?

MCQS
1. As per AS 10 (Revised) ‘Property, plant and equipment’, which of the following costs is not
included in the carrying amount of an item of PPE
(a) Costs of site preparation (b) Costs of relocating
(c) Installation and assembly costs. (d) initial delivery and handling costs
2. As per AS 10 (Revised) ‘Property, Plant and Equipment’, an enterprise holding investment
properties should value Investment property
(a) as per fair value (b) under discounted cash flow model.
(c) under cost model (d) under cash flow model
3. A plot of land with carrying amount of ` 1,00,000 was revalued to ` 1,50,000 at the end of
Year 2. Subsequently, due to drop in market values, the land was determined to have a fair
value of ` 1,30,000 at the end of Year 4. Assuming that the entity adopts Revaluation Model,
what would be the accounting treatment of Revaluation?
(a) Initial upward valuation of ` 50,000 credited to Revaluation Reserve. Subsequent
downward revaluation of ` 20,000 debited to P/L.
(b) Initial upward valuation of ` 50,000 credited to P/L. Subsequent downward revaluation
of ` 20,000 debited to P/L.
(c) Initial upward valuation of ` 50,000 credited to Revaluation Reserve.
Subsequent downward revaluation of ` 20,000 debited to Revaluation Reserve.
(d) Initial upward valuation of ` 50,000 debited to P/L. Subsequent downward revaluation
of ` 20,000 credited to P/L.
4. A plot of land with carrying amount of ` 1,00,000 was revalued to ` 90,000 at the end of Year
2. Subsequently, due to increase in market values, the land was determined to have a fair
value of ` 1,05,000 at the end of Year 4. Assuming that the entity adopts Revaluation Model,
what would be the accounting treatment of Revaluation?
(a) Initial downward valuation of ` 10,000 debited to Revaluation Reserve. Subsequent
upward revaluation of ` 15,000 credited to P/L.
(b) Initial downward valuation of ` 10,000 debited to P/L. Subsequent upward revaluation
of ` 15,000 credited to P/L.
(c) Initial downward valuation of ` 10,000 debited to P/L. Subsequent upward revaluation
of ` 10,000 credited to P/L and ` 5,000 credited to Revaluation Reserve.
(d) Initial downward valuation of ` 10,000 credited to P/L. Subsequent upward revaluation
of ` 10,000 debited to P/L and ` 5,000 debited to Revaluation Reserve.
5. On sale of an asset which was revalued upwards, what would be the treatment of Revaluation
Reserve?
(a) The Revaluation Reserve is credited to P/L since the profit on sale of such asset is now
realized.

(b) The Revaluation Reserve is credited to Retained Earnings as a movement in reserves

without impacting the P/L.
(c) No change in Revaluation Reserve since profit on sale of such asset is already impacting
the P/L.
(d) The Revaluation Reserve is reduced from the asset value to compute profit or loss.
6. A machinery was purchased having an invoice price ` 1,18,000 (including GST ` 18,000) on 1
April 20X1. The GST amount is available as input tax credit.
The rate of depreciation is 10% on SLM basis. The depreciation for 20X2-X3 would be
(a) ` 10,000. (b) ` 11,800. (c) ` 9,000. (d) ` 10,500.
Answers
1 (b) 2 (c) 3 (c) 4 (c) 5 (b) 6 (a)

HOME WORK
Q-1 Entity A exchanges car X with a book value of ` 13,00,000 and a fair value of ` 13,25,000 for
cash of ` 15,000 and car Y which has a fair value of ` 13,10,000.
The transaction lacks commercial substance as the company’s cash flows are not expected
to change as a result of the exchange. It is in the same position as it was before the
transaction. What will be the measurement cost of the assets received?
Sol. Since the transaction lacks commercial substance, the entity recognises the assets received
at the book value of car X. Therefore, it recognises cash of ` 15,000 and car Y as PPE with a
carrying value of ` 12,85,000.
The following journal entry will be passed in the books of Entity A:
Cash/ Bank A/c Dr. 15,000
Car Y A/c (balancing figure) Dr. 12,85,000
To Car X A/c 13,00,000
Q-2 A company changed its method of depreciation from SLM to WDV. How should the change
be recognised?
Sol. As per AS 10, Property, Plant and Equipment, the depreciation method applied to an asset
should be reviewed at least at each financial year-end and, if there has been a significant
change in the expected pattern of consumption of the future economic benefits embodied
in the asset, the method should be changed to reflect the changed pattern. Such a change
should be accounted for as a change in an accounting estimate in accordance with AS 5.
Accordingly, the change in method of depreciation should be accounting for as a change in
accounting estimate, prospectively.
Q-3 A company has debited the Building Account with the Cost of the Land on which the building
stands and has provided depreciation on such total cost.
Comment on the accounting treatment.
Sol. As per AS 10, Property, Plant and Equipment, each part of an item of property, plant and
equipment with a cost that is significant in relation to the total cost of the item should be
depreciated separately. Further, Land and buildings are separable assets and are accounted
for separately, even when they are acquired together. With some exceptions, such as quarries
and sites used for landfill, land has an unlimited useful life and therefore is not depreciated.
Buildings have a limited useful life and therefore are depreciable assets.
In the given case, land should not be depreciated unless it has a limited useful life. Accordingly,
it is incorrect to debit the cost of land to the Building Account and provide depreciation on
the aggregate cost.
Q-4 An entity is setting up a manufacturing plant. Construction of the plant is completed in
August and the plant is ready for commercial production in November. However, the entity
commences production in March. When should be company start charging depreciation.

Sol. As per AS 10, Property, Plant and Equipment, depreciation of an asset begins when it is
available for use, i.e., when it is in the location and condition necessary for it to be capable
of operating in the manner intended by management.
In the given case, since the plant is ready for commercial production in November, depreciation
shall commence from November. The date of commencement of commercial production is
irrelevant for charging depreciation.
Q-5 Which factors should be considered by a company while determining useful life?
Sol. All the following factors are considered in determining the useful life of an asset:
(a) expected usage of the asset. Usage is assessed by reference to the expected capacity
or physical output of the asset.
(b) expected physical wear and tear, which depends on operational factors such as the
number of shifts for which the asset is to be used and the repair and maintenance
programme, and the care and maintenance of the asset while idle.
(c) technical or commercial obsolescence arising from changes or improvements in
production, or from a change in the market demand for the product or service output
of the asset. Expected future reductions in the selling price of an item that was
produced using an asset could indicate the expectation of technical or commercial
obsolescence of the asset, which, in turn, might reflect a reduction of the future
economic benefits embodied in the asset.
(d) legal or similar limits on the use of the asset, such as the expiry dates of related
leases.
Q-6 ABC Ltd. is installing a new plant at its production facility. It provides you the following
information:
Rs.
Cost of the plant (cost as per supplier's invoice) 31,25,000
Estimated dismantling costs to be incurred after 5 years 2,50,000
Initial Operating losses before commercial production 3,75,000
Initial delivery and handling costs 1,85,000
Cost of site preparation 4,50,000
Consultants used for advice on the acquisition of the plant 6,50,000
You are required to compute the costs that can be capitalised for plant by ABC Ltd., in
accordance with AS 10: Property, Plant and Equipment.
Ans. According to AS 10 on Property, Plant and Equipment, the costs which will be capitalized by
ABC Ltd.:
Rs.
Cost of the plant 31,25,000
Initial delivery and handling costs 1,85,000
Cost of site preparation 4,50,000

Consultants' fees 6,50,000

Estimated dismantling costs to be incurred after 5 years 2,50,000
Total cost of Plant 46,60,000
Note: Operating losses before commercial production amounting to Rs.3,75,000 will not be
capitalized as per AS 10. They should be written off to the Statement of Profit and Loss in
the period they are incurred.
Q-7 A Ltd. had following assets. Calculate depreciation for the year ended 31st March, 2020 for
each asset as per AS 10 (Revised):
(i) Machinery purchased for ` 10 lakhs on 1st April, 2015 and residual value after useful
life of 5 years, based on 2015 prices is ` 10 lakhs.
(ii) Land for ` 50 lakhs.
(iii) A Machinery is constructed for ` 5,00,000 for its own use (useful life is 10 years).
Construction is completed on 1st April, 2019, but the company does not begin using
the machine until 31st March, 2020.
(iv) Machinery purchased on 1st April.2017 for ` 50,000 with useful life of 5 years and
residual value is NIL. On 1st April, 2019, management decided to use this asset for
further 2 years only.
Ans. Computation of amount of depreciation as per AS 10
`
(i) Machinery purchased on 1/4/15 for ` 10 lakhs Nil
(having residual value of ` 10 lakhs)
Reason: The company considers that the residual value, based on prices
prevailing at the balance sheet date, will equal the cost. Therefore, there
is no depreciable amount and depreciation is correctly zero.
(ii) Land (50 lakhs) (considered freehold) Nil
Reason: Land has an unlimited useful life and therefore, it is not
depreciated.
(iii) Machinery constructed for own use (` 5,00,000/10) 50,000
Reason: The entity should begin charging depreciation from the date the
machine is ready for use i.e. 1st April,2019. The fact that the machine
was not used for a period after it was ready to be used is not relevant in
considering when to begin charging depreciation.
(iv) Machinery having revised useful life 15,000
Reason: The entity has charged depreciation using the straight-line
method at ` 10,000 per annum i.e (50,000/5 years). On 1st April,2019 the
asset’s net book value is [50,000 – (10,000 x 2)] i.e. ` 30,000. The
remaining useful life is 2 years as per revised estimate. The company
should amend the annual provision for depreciation to charge the

unamortized cost over the revised remaining life of 2 years.

Consequently, it should charge depreciation for the next 2 years at

` 15,000 per annum i.e. (30,000 / 2 years).
Q-8 A Ltd. has incurred the following costs. Determine if the following costs can be added to
the invoiced purchase price and included in the initial recognition of the cost of the item of
property, plant and equipment:
1. Import duties paid
2. Shipping costs and cost of road transport for taking the machinery to factory
3. Insurance for the shipping
4. Inauguration costs for the factory
5. Professional fees charged by consulting engineer for the installation process
6. Costs of advertising and promotional activities
7. Administration and other general overhead costs
8. Cost of site preparation.
Ans. Included in Cost:
Point no. 1,2,3,5,8
Excluded from Cost:
Point no. 4,6,7
Q-9 B Ltd. owns an asset with an original cost of ` 2,00,000. On acquisition, management
determined that the useful life was 10 years and the residual value would be ` 20,000. The
asset is now 8 years old, and during this time there have been no revisions to the assessed
residual value.
At the end of year 8, management has reviewed the useful life and residual value and has
determined that the useful life can be extended to 12 years in view of the maintenance
program adopted by the company. As a result, the residual value will reduce to ` 10,000.
How would the above changes in estimates be made by B Ltd.?
Ans. The above changes in estimates would be effected in the following manner:
The asset has a carrying amount of ` 56,000 at the end of year 8 [` 2,00,000 – ` 1,44,000] i.e.
Accumulated Depreciation.
Accumulated depreciation is calculated as
Depreciable amount {Cost less residual value} = ` 2,00,000 – ` 20,000 = ` 1,80,000.
Annual depreciation = Depreciable amount / Useful life = 1,80,000 / 10 = ` 18,000.
Accumulated depreciation = 18,000 × No. of years (8) = ` 1,44,000.
Revision of the useful life to 12 years results in a remaining useful life of 4 years (12 – 8).
The revised depreciable amount is ` 46,000. (56,000 – 10,000)
Thus, depreciation should be charged in future at ` 11,500 per annum (` 46,000/4 years).
Q-10 Determine if the following costs can be added/subtracted to the invoiced purchase price for
the initial recognition of the cost of the asset:

1. Consultants fees for choosing the new asset

2. A trade discount received of 5% of the purchase price of the asset
3. A discount received for paying the invoice within 90 days
4. Interest paid on a short term loan taken to provide the necessary cash for payment
of the purchase price
5. Import duties paid
6. Shipping costs and cost of road transport
7. Insurance for the shipping
8. An economic development rebate from the state
9. VAT paid on the purchase
10. Cost of laying a new concrete slab and installing special rubber mounted footings for
the new press in order to reduce vibration during use
11. Hire of a crane to transfer the press from the vehicles into the factory
12. Costs associated with removing a section of the factory roof to allow the machine to
be dropped into place and subsequently refitting the roof
13. Cost of installing soundproofing in the roof at the same time in order to provide
protection for workers in other parts of the factory building
14. Professional fees charged by consulting engineer for overseeing the installation process
15. Electricians fees for connecting the press to the power supply
16. A portion of the operating costs (salaries, office expenses) of the purchasing department
17. Costs of materials (papers and inks) used in calibrating the machine and setting it up
for operation
18. Costs of training the operators of the new machine
19. A portion of the inefficiencies in production for the first month of use while the
operators became comfortable with using the machine
Ans. Included in Cost:
Point no. 1,2,5,6,7,8,10,11,12,14,15 and 17
Excluded from Cost:
Point no. 3,4,9,13,16,18 and 19

As 10

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CHAPTER-5 Assets Based Accounting Standards

AS-10 : PROPERTY, PLANT AND EQUIPMENT

180 Navkar Institute

amount and recognition of an impairment loss.

CA Intermediate | Paper-1 | Advanced Accounting 181

· Initial estimate of cost of dismantling/decommissioning, removing and site restoration

182 Navkar Institute

v Revaluation of Fixed Assets:

CA Intermediate | Paper-1 | Advanced Accounting 183

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Ø The depreciation based on original cost

CA Intermediate | Paper-1 | Advanced Accounting 185

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CA Intermediate | Paper-1 | Advanced Accounting 187

Ø Asset is retired from active use and held for disposal

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CA Intermediate | Paper-1 | Advanced Accounting 189

190 Navkar Institute

CA Intermediate | Paper-1 | Advanced Accounting 191

192 Navkar Institute

CA Intermediate | Paper-1 | Advanced Accounting 193

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CA Intermediate | Paper-1 | Advanced Accounting 195

3. Cost of site preparation `6,00,000

CA Intermediate | Paper-1 | Advanced Accounting 197

the period 01.10.16 to 31.12.16)*

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200 Navkar Institute

CA Intermediate | Paper-1 | Advanced Accounting 201

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CA Intermediate | Paper-1 | Advanced Accounting 203

ii) Book Value of Plant and Machinery as on 31.03.2015

(10% is chargeable to the fixed asset constructed)

204 Navkar Institute

CA Intermediate | Paper-1 | Advanced Accounting 205

is required in applying the recognition criteria to an entity’s specific circumstances. The

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CA Intermediate | Paper-1 | Advanced Accounting 207

(b) The Revaluation Reserve is credited to Retained Earnings as a movement in reserves

1 (b) 2 (c) 3 (c) 4 (c) 5 (b) 6 (a)

208 Navkar Institute

CA Intermediate | Paper-1 | Advanced Accounting 209

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Consultants' fees 6,50,000

CA Intermediate | Paper-1 | Advanced Accounting 211

unamortized cost over the revised remaining life of 2 years.

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1. Consultants fees for choosing the new asset

CA Intermediate | Paper-1 | Advanced Accounting 213

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