Manufacturing Private Limited (MPL) purchased a plant on 1st January 2003. The following details are applicable to this transaction:
Purchase price 149,340
Delivery cost 4,221
Installation cost 6,579
General and administration cost 1,000
Cost of testing 5,000
Pre-production cost 2,000
Initial operating losses 10,000
The purchase price of Rs. 149,340 is payable on 31st December 2003. Normally vendors do not
provide such plants on credit basis. The current market interest rate is 14% per annum.
All administrative costs are of indirect nature.
In order to check that the plant is working properly or not some sample products have been made
from this plant and the cost incurred on these samples are included in the testing cost. These
samples were sold at net proceeds of Rs.500. This cost is considered necessary by the
management in order to check the plant’s initial capacity.
The initial operating losses are charged to the initial production of small lots.
The plant was ready on 3rd January 2003 and immediately put into use.
It is decided to depreciate the plant on straight line method over 8 years; taking into account the
residual value of plant is Rs. 7,000.
It is assumed that the liability to dismantle and remove the machine exists at the end of its useful
life at a cost of Rs. 3,500 (discounted present value if Rs. 1,700).
At the end of 8th year plant was sold at Rs. 10,000.
Ignore value added tax.
1. Determine the plant’s cost to be recognized in MPL’s books as per IAS 16. (Marks: 10)
2. Prepare a depreciation schedule of plant for 8 years by following the format given below.
3. Calculate the amount of profit or loss on disposal of the plant. (Marks: 02)
24 hours extra / grace period after the due date is usually available to overcome uploading
difficulties. This extra time should only be used to meet the emergencies and above mentioned
due dates should always be treated as final to avoid any inconvenience.
Plant cost as per IAS 16
Cost = Purchase cost + delivery cost + Installation cost + cost of testing
Cost = 149,340 + 4221 + 6,579 + 5000 = 165140
Depreciable amount= (cost – residual value)
Depreciable amount= (165140– 7000)=158140/8=19768
|Depreciation||Accumulated depreciation||Carrying value|
Profit /loss on disposal of plant = sold price of plant – carrying value (or book value)
Profit /loss on disposal of plant =10000 – 4
Profit /loss on disposal of plant = 6996 (profit)