Question

New Horizon Corporation has recently purchased and installed a new machine. Using below given information, what is the cost that can be capitalized for the machine under IAS 16. (Show your work)

COST ITEM	AMOUNT (Thousand AED)
Purchase price of the machine	2,000
Initial delivery, handling and testing costs	100
Cost of site preparation	250
Costs of relocating part of an entity’s operations after installing the new machine	45
5% import duty paid on purchase price	??????
Advertising and promotional cost	17
Net proceeds from the sale of products arising from test production	20

Answer 1

Cost Of The Machine (Including all costs that can be capitalized)

Particulars	Amount(Thousand AED)
Purchase price of the machine	2000
Initial delivery, handling and testing	100
Cost of Site Preparation	250
Import duty(5% 2000)	100
Less: Net proceeds of test production	( 20)
Cost of the Machine	2430

Note

1. Since IAS 16 states that Cost includes Purchase cost plus all the the expenses directly attributable or necessary to bring the asset into working condition for its intended use, the Advertising and Promotion costs are not included .
2. Expenses on relocating part of entity’s operation after the installation of the machine does not form part of the carrying cost of the asset as per IAS 16.