Enormous Berhad bought a building situated on a piece of leasehold land located at a prime location. The advertised price of the property is RM2.5 million, of which RM800,000 is in respect of the building while the balance is for the leasehold land. After a series of negotiation, the seller agreed to reduce the price of the leasehold land by 10%. In addition, the company paid legal fee of RM36,000, of which 40% is for the leasehold land. The land has a balance of lease period of 80 years. After the end of the lease period, Enormous is required to remove and dismantle all items on the leasehold land at an expected cost of RM50,000.
The building is old and based on its current condition, it can be used only for another 10 years. Hence, the company decided to undertake major renovation before the building is occupied. Details of the costs of major renovation are shown below:
Major repair on the building’s exterior. The repair extends the useful life of the building to 50 years = 143,000
Renovation of the interior of the building, to meet the specific needs of the company = 64,000
Cleaning and polishing of the floor = 5,400
Installation of centralised air-conditioning units to the whole building. These air-conditioning units are expected to have a useful life of 10 years = 20,000
Fire insurance premium on the building = 4,200
Purchase of workstations and other office equipment, all of which are expected to last for 6 years. = 18,000
Fee paid to the Fire and Rescue Department to obtain Certificate of Fitness for Occupation of Building. Included in this amount is RM3,000 penalty for non-compliance of regulations. = 10,000
Other administrative and clerical expenses = 2,800
Required: Based on MFRS 116 Property, Plant and Equipment,
1. Identify all items of property, plant and equipment that can be determined from the above.
2. For each item, indicate the cost that need to be capitalised.
3. For each cost that you decided not to capitalise, indicate your reason.
1. Property, Plant and Equipment
Land
Building
Air conditioning System
Work Station and Office Equipment
2. Cost of Capitalization
| Land | |
| Purchase Cost | 1,530,000 |
| Prof Fee | 14,400 |
| 1,544,400 |
| Bldg | ||
| Purchase Cost | 800,000 | |
| Prof Fee | 21,600 | (Incidental cost of Purchase) |
| Major Renovation | 143,000 | (adds to Bldg life to 50 Yrs) |
| 821,600 |
Work Station and Office Equipment - 18,000 (with expected life of 6 Yrs)
Air Conditioning System - 20,000 (with expected life of 20 Yrs)
3. Below cost are not capitalize. These are Revenue expense in nature and does not add to Capital value of asset. These are incurred in day to day operations of business and part of routine cost of maintenance of business.
Interior Renovation - 60,000
Cleaning and Polishing of the floor - 5,400
Fire Insurance Premium - 4,200
Certificate of Fitness for Bldg - 10,000
Other Admin and Clerical expenses - 2,800
Enormous Berhad bought a building situated on a piece of leasehold land located at a prime...