Question

During 2018, Voodoo Limited decided to update and network the company's computer equipment. The details are as follows: List price of computer hardware Additional costs: 1,000,000 Shipping and handling Cabling and wiring One month testing prior to going live Four year on-site maintenance contract Own staff costs related to preparation of offices prior to installation 40,000 60,000 20,000 160,000 32,000 With respect to computer hardware, Voodoo Limited negotiated a 10 % trade discount on the list price and took advantage of a 5% early settlement discount for payment within 30 days.

What are the accounting implications of the issue above? Can you also clearly show any accounting adjustments required?

Answer 1

	In accordance with IAS 16, all costs required to bring an asset to its present location and condition for its intended use should be capitalised. Therefore, the initial purchase price of the asset should be:
	List price	1,000,000
	Less: Trade Discount	(100,000)
		900,000
	Shipping and handling	40,000
	Cabling and wiring	60,000
	Testing Charges	20,000
	Total value of assets to be capitalized	1,020,000
	The maintenance contract of 160,000 is an expense and therefore should be spread over a four-year period in accordance with the accruals concept and taken to the income statement. If the 160,000 has been paid in full, then some of this cost will represent a prepayment. In addition the settlement discount received of 45,000 (900,000 x 5%) is to be shown as other income in the income statement.
	Own Staff cost is employee benefit expense and has nothing to do with capitalization.