Question

20 What is the depreciation expense for each equipment purchased by Walkers Ltd. to be charged for the first year knowing that it uses 200% declining balance method (refer to Question (16) above)? Justify your answer.

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6 Walkers Ltd. buys robots for stacking products inside the warehouse costing $1,850,000. The company pays $160,000 for installation and $38,000 for training four members of staff on how to use it. They also pay the supplier $23,500 to test the robot prior to starting its usage in the warehouse. Six months after starting to use the equipment, the company pays the supplier $126,000 for a broken part that was due to the operator listing a crate that was too heavy for the robot. The supplier explained that as the robot was used outside its specifications, the fault is not covered by the warranty and must be paid by Johnson. How much will Ellie be required to capitalise as the cost of the machine? Justify your answer.

Robot capitalized cost:	Amount
Robot purchases cost	$ 1,850,000
Add: installation cost	160,000
Training cost	38,000
Robot testing cost	23,500
Repairing cost	126,000
Capitalized robot cost	$ 2,197,500

Answer 1

Note No.1   Training Cost

As per IAS16 an item of property, plant and equipment should initially be recorded at cost. [IAS16.15] Cost includes all costs necessary to bring the asset to working condition for its intended use. This would include not only its original purchase price but also costs of site preparation, delivery and handling, installation, related professional fees for architects and engineers, and the estimated cost of dismantling and removing the asset and restoring the site.

Costs that do not provide future economic benefits are expensed in the period incurred. The initial training costs are not necessary to get the asset ready for use. Rather, the training costs are necessary to get the employees ready to use the asset. Thus, the training costs are immediately expensed.

Note No.2 Testing cost

[IAS16.15] Cost includes all costs necessary to bring the asset to working condition for its intended use. This would include not only its original purchase price but also costs of site preparation, delivery and handling, installation, related professional fees for architects and engineers, and the estimated cost of dismantling and removing the asset and restoring the site.

Testing is necessary to check whether the robot is working as desired or not and it is prior to starting its usage in the warehouse. It is necessary to bring the asset to working condition for its intended use. So it is capitalized.

Note No. 3 Repairs Cost

Repairs and maintenance expenses are generally NOT capitalized
Repairs and maintenance are expenses a business incurs to restore an asset to a previous operating condition or to keep an asset in its current operating condition. Under Generally Accepted Accounting Principles (GAAP), you must record repairs and maintenance expenses to operating expense in your records and report them on your financial statements in the period in which they were incurred.

The costs for repairs and maintenance refers to normal, regularly recurring expenditures required to keep property in an efficient operating condition; neither adding to the value of equipment nor appreciably prolonging its life. This type of expenditure, regardless of cost, should be expensed and should not be capitalized.

When can equipment repairs be capitalized?
Equipment repairs and/or purchase of parts over $5,000 (including upgrades and improvement) which increase the usefulness and efficiency of the equipment can be capitalized.

From the question it is not clear that repair cost increase the usefulness and efficiency of the equipment. It is a replacement of a part which is major but does not increase the usefulness and efficiency of the equipment.

So repair cost expensed

However there may be a different opinion of other expert.

What is the double declining balance method of depreciation?

The double declining balance method of depreciation, also known as the 200% declining balance method of depreciation

Under the double declining balance method, double means twice or 200% of the straight line depreciation rate. Declining balance refers to the asset's book value or carrying value at the beginning of the accounting period. Book value is an asset's cost minus its accumulated depreciation. The asset's book value will decrease when the contra asset account Accumulated Depreciation is credited with the depreciation expense of the accounting period.

In the question life of the assets is not given, so we cannot calculate the deprecation