Question

Accounting treatment for PPE

Twister Ltd recently acquired a second-hand machine for installation in its factory. The machine was acquired from Robert Ltd, with Twister Ltd giving a block of land plus $5 000 cash in exchange for the machine. The land had been acquired by Twister Ltd for $200 000 three years ago, but was considered to have a fair value of $300 000 at the date of exchange. The machine had a carrying amount in the records of Robert Ltd of $310 000 at this date.

Twister Ltd planned to use the machine in its main factory. The installation of the machine would require that it be cemented into the factory floor in order to achieve sufficient stability for the machine to operate. The cost is expected to be $550. However, when the machine is replaced in three years’ time, the costs of removal of the machine are expected to be $250. As the operation of the machine requires some technical knowledge, current staff will need to be trained for its use. As it has supplied the machine, Robert Ltd has agreed to supply training at a cost of $250.

Required:
The accountant of Twister Ltd is unsure of how to account for the acquisition of the machine and has asked for your advice. Prepare a report providing detailed advice to the accountant.

The report should include the following:

1. What are the recognition criteria for property, plant and equipment?     


2. How should items of property, plant and equipment be measured at point of initial recognition.
    


3. How is cost determined in accordance with AASB116?     


4. Estimate the cost of the Machine as per para 16 of AASB116.                 

Answer 1

1. Recognition criteria for property, plant and eqyipment is exchange of assets, as company is acquiring machine in exchange of land and cash price.

2.Plant,property and equipment recognised at time of initial recognisation in exchange of assests is as:

Recognising PPA at fair value of assest acquired in books as cost price,IN EXCHANGE OF FAIR VALUE OF ASSEST GIVEN AND DIFFERENCE IS SETTLED BY CASH.as per AASB116.

3 Cost determined as per AASB116 is to capitalise all the expenses which are required to make machine use in operations fooperating the machine to bring the condition for its use like instalation cost, expected cost of removal in future.

4..Cost as per AASB116 is given below"

Cost of acquisitin in exchange of assets is carrying amount ofmachine acquired that is: $ 310000

(+) Instalation cost of machinary $ 550

(+) Expected cost of removal $ 250

Staff Training cost is not included as acquisition cost as per AASB116,as staff might not continue in future to operate machine.