Question

Company has its fiscal year end on 31 December. On 1 April 2015 Company acquired a machine Under the following terms.

Invoice price payable to manufacturer 2'000'000

Trade discount(applies to base price only) 15%

Transporation costs 50'000

Instalation charges 45'000

Staff training in use of machine 60'000

Pre-production testing costs 35'000

Purchase of a three test;ng costs 90'000

Machine has a 10 year useful life and zero residual value.

On 1 October 2017 Dearing decided to upgrade the machine by adding new components at a cost of $300'000. This upgrade led to a reduction in the production time per unit of the goods being manufactured using the machine. Useful life was not impacted.

Required:

a. What amount should be recognized under non-current assets as the cost of the machine?

b. In respect of the machine and costs listed above, what total amount would be charged agains profit in 2015?

c. What will be the carrying value of the machine on 1 October 2017 after accounting for the $300'000 upgrade?

d. Every five years the machine will need a major overhaul in order to keep running. Assuming that the cost of the overhaul to be done in the beginning of 2020 is $100'000, what expenses will be charhed against profits in 2020 related to this overhaul?

e. Assume that 2021 Company decides to rent the machine to another company. The following amounts were established in respect of the machine Fair Value of the machine was decided to be $1'700'000.

What should be the carrying value after Company revalues the machine?What will be the resulting impact on either revaluation surplus or/and statement of profit or loss due to revaluation? No need for calculations just explain which of these will be impacted and whether it will be a positive or negative impact, justify your answer by explanations.

Answer 1

Answer to the part a.

The cost for the machine includes the purchase cost plus expenditures upto the installation thus in the above case, the value of the machine will be as followes:-

Cost of Machine

Purchase Cost (Invoice Value)	2000000
Less :- Trade Discount 15%	(300000)
Value	1700000
Transporation costs	50000
Instalation charges	45000
Staff training in use of machine	60000
Pre-production testing costs	35000
Purchase of a three test;ng costs	90000
Total Cost of Machine	$1980000

Answer to the part b.

Since all expenses are before installation, thus no one expense will be charged against the profit for the year 2015.

Answer to the part c.

After upgradation the carrying value will be $1980000+$300000= $2280000 since upgrade is in the nature of capital upgrade thus will be added in cost of machine.

Answer to the part d.

Since the overhaul expenses in order to keep running the machine is necessary thus the same will also be capitalized with the value of machine and thus will not charged with profit in that year.