Question

1. On the 1 January 2014, Lucky Limited opened a new plant in New Delhi. The following costs were incurred during January 2014 with regards to the new PPE, excluding taxes:

invoiced price of the PPE     60 000 000

• costs of testing of plant to ensure that it is operating in the manner intended by management 2 000 000

• proceeds from the sale of the goods produced in testing (600 000)

• costs incurred in selling the scrap produced during testing 100 000

plant opening function for dignitaries, staff and clients 1 000 000

Starting 1 February 2014, the plant was ready to operate as intended by the management. The plant incurred an operating loss of $5 000 000 for the month ended 28 February 2014, primarily due to initial low orders levels. Production levels reached break-even point in early March 2014, and thereafter the plant operated profitably.

Compliance body requires that the business site where the plant is developed be rehabilitated by Lucky Limited at the end of the plants useful economic life that has been reliably estimated at 10 years. On the 1 January 2014, an environmental restoration provision of $1 million was, in accordance with IAS provisions, raised.

Required:

a. Calculate the cost of the PPE in accordance with IAS 16.

b. Explain the implication of your answer

Answer 1

a.

Cost of PPE is $63,000,000

PS:- Restoration provision is assumed to be the present value of future obligation.

b.

From the above calculation of cost of the PPE, it can be concluded that, not all costs associated with purchase and installation of a PPE can be capitalized. Only the costs relevant to bring the PPE into proper working situations are capitalized. All othe costs are expensed through the profit and loss account.