Question

On 1 January 2014, KimBell Bhd acquired a bulk plant and equipment from Sun Bhd. The economic life was estimated to be 20 years at a cost of RM4.8 million. In addition, at the date, KimBell Bhd also incurred import duties and freight charges amounting to RM300,000 as well as an installation cost of the plant and equipment of RM220,000. KimBell closes its account every 31 December. The plant and equipment was depreciated on a straight line basis. The following subsequent expenditures were incurred during the year ended 31 December 2019 by KimBell Bhd regarding the plant and equipment:  Service cost of RM53,800 per annum to maintain the plant.  On 1 January 2019, KimBell replaced one of the parts that were severely damaged. Although there was no change in production volume, the change has resulted in significant reduced of cost. The carrying amount of the old component as at that date was RM36,000. New part cost RM55,000.  On 31 December 2019, an old component which has carrying amount of RM136,000 was replaced with the new component. The purchase of the new component worth RM 255,000. Required: Advice KimBell on appropriate accounting treatment for each of the subsequent expenditure stated above. You are also required to indicate the depreciation charged during the year ended 31 December 2019.

Answer 1

Date	Details	Cost	Acc. Depn.	Book value
Dec 31,2018	Plant & equipment at cost as at Dec 31, 2018/jan 1. 2019 =	5320000	1330000	3990000
1-Jan-19	Old part replaced	-48000	-12000	-36000
1-Jan-19	Cost of New part	55000	0	55000
	Remaining value	5327000	1318000	4009000
Dec 31,2019	Depn. For 2019(5327000/15yrs.)		355133	-355133
	Old part replaced	-194286	-58286	-136000
	Cost of New part	255000	0	255000
Dec 31,2019	Balance	5387714	1614847	3772867

As both expenditures are replacement , notin the nature of regular maintenance, both replacements are to be treated as capital expenses, forming part of the asset & hence need to be accounted vide the following journal entries

The journal entry on Jan 1, for replacement will be	Debit	Credit
New part	55000
Acc. Depn.-old part	12000		(36000/15*5=12000--5 yrs.St. line depn.)
Old part		48000	(36000/15*20=48000 Original cost)
Gain on replacement (Bal. fig.)		19000
Now. Depreciation is provided on the balance (for balance 15 years)after this JE , as the next replacement JE is only on Dec 31, 2019---- which will not have any effect on this year's depreciation expense.
The journal entry on Dec 31,2019 for replacement will be
New part	255000
Acc. Depn.-old part	58286		(136000/14*6=12000--6 yrs.St. line depn.)
Old part		136000	(136000/14*20= 194286 Original cost)
Gain on replacement (bal.fig.)		177286