Question

On 01 January 2016, Polluter Limited opened a new plant in Pietermaritzburg.

The following costs were incurred during January 2016 in respect of the new plant (all excluding VAT):

	R
Invoiced price of the plant	6 000 000
Direct costs of testing the plant to ensure full operation as intended	500 000
Proceeds from sale of samples	600 000
Costs incurred in selling samples	100 000
Plant opening function	1 000 0000

The plant was in use from 01 January 2016. The plant incurred an operating loss of R200 000 for the month ended 31 March 2016 due to low order levels. The plant is depreciated using the straight-line method at 10%.

The company uses the revaluation model and revalues its plant on an annual basis and records the fair value adjustments. The following revaluations were performed:

Fair value 01/01/2017                                                                     R5 490 000

Fair value 01/01/2018                                                                     R5 000 000

Required:

2.1 Calculate the cost of the plant as at 01 January 2016. (5)

2.2 Prepare the journal entries in the general journal for the end of years: (Show all workings)

2.2.1   2016                   (5)

2.2.2 2017                   (8)

2.2.3   2018                   (7)

Answer 1

2.1 Calculation of the cost of the plant as at 01 January 2016:

Particulars	$	$
Invoiced price of the plant		$          6,000,000
Direct costs of testing the plant to ensure full operation as intended		$             500,000
Less : Proceeds from sale of samples		($ 600,000)
Costs incurred in selling samples		$             100,000
Plant opening function		$                        -
Total cost		$         6,000,000

Note :

1. Plant opening function will not be considered as part of cost of plant

2. Proceeds from sale of samples needs to reduced from cost of plant

2.2 Journal entries in the general journal for the end of years:

	Date	Particulars	Debit	Credit
2.2.1	01-Jan-16	Plant Account	$       6,000,000
		To Bank Account		$          6,000,000
		(Being Purchase of new plant)

	Date	Particulars	Debit	Credit
2.2.2	01-Jan-17	Plant Account	$            90,000
		To Revaluation Reserve		$               90,000
		(Being Upward revaluation of plant)

(Refer Working - 1)

	Date	Particulars	Debit	Credit
2.2.3	01-Jan-18	Plant Account	$          140,000
		To Revaluation Reserve		$             140,000
		(Being Upward revaluation of plant)

(Refer Working - 2)  

Note : No need to consider the operating loss of $ 200,000 for the month ended 31 March 2016 due to low order levels.

Working : 1
Value of plant (as on 1st Jan 2016)	$       6,000,000
Less : Depreciation for 2016 (@10%)	$          600,000
Value of plant (as on 1st Jan 2017)	$       5,400,000
Fair value 01/01/2017	$       5,490,000
Increase in value	$            90,000

Working : 2
Value of plant (as on 1st Jan 2017)	$       5,400,000
Less : Depreciation for 2017 (@10%)	$          540,000
Value of plant (as on 1st Jan 2018)	$       4,860,000
Fair value 01/01/2018	$       5,000,000
Increase in value	$          140,000