Question

Taran Corporation purchased a machine on January 1, 2017, for $55,000. Before the machine was utilized in a productive capacity, it was needed to build a support in value of $7,000 to accommodate the machine. For security reasons, a 5-years insurance policy was purchased for the machine in value of $5,000.

Depreciation on the machine was recorded at the end of each year. The depreciation rate is $6,200 per year. On February 1, 2020, the machine was sold for $45,000.

What is the carrying amount of machine at December 31, 2017?

48.800

55.000

55.800

60.000

Answer 1

Correct Answer : 3rd Option : 55.800

Explanation : As per IAS 16 : Property, Plant and Equipment (or any other accounting standard being convergence of IAS/IFRS), cost of machine should include purchase price and also the directly attributable cost incurred to bring the machine in its present location and condition intended by the management. Hence, here Cost of machine capitalized in books = Purchase Price + Cost of Support built to accommodate the machine (being directly attributable).

i.e. =  $ 55,000 + $ 7,000 = $ 62,000

Depreciation for 1-Jan-17 to 31-Dec-17 is $ 6,200.

Hence, carrying amount of machine as on 31-Dec-17 is (62,000 - 6,200) = $ 55,800.

Hence, 3rd Option is correct.

Note : Insurance policy taken on machine is a separate contract and not directly attributable to bring the machine in its present condition and location. Hence, it is not added to cost of machine. It will be written off to P/L : $ 1,000 each year for 5 years.