Question

Xie Pte Ltd was incorporated on 2 January 2017 and commenced business on 1 July 2018. The following expenditures were incurred on plant and machinery:

• 2 January 2017 to 31 December 2017 $150,000
• 1 January 2018 to 30 June 2018 $200,000
• 1 July 2018 to 31 December 2018 $300,000

The company’s year-end is 31 December.

Answer 1

Date of Incorporation : 2 January 2017

Date of Commencement of Business : 1 July 2018

Treatment of Expenditure Incurred on Plant and Machinery :

1) 2 January 2017 to 31 December 2017 $150,000 :

These expenses are incurred Prior to the date of Incorporation.

Since, Xie Ltd. will not have any Financial Statements for the year ended 2017, $ 1,50,000 incurred on Capital Expenditure will be carried to next accounting period for Capitalisation.

2) 1 January 2018 to 30 June 2018 $200,000 :

These Expenses are Capital in nature incurred prior to the date of commencement of Business.

Hence, these should be capitalized in the books for the year ended 2018.

3) 1 July 2018 to 31 December 2018 $300,000 :

These expenses are incurred after the commencement of Business.

Since, no information is given about the nature of expenditure, we can assume it as both Revenue and Capital Nature. But Considering the amount involved, it is appropriate to assume $ 3,00,000 incurred are in Capital nature rather than Revenue nature.

Therefore, $ 3,00,000 should be capitalized in books for the year ended 2018

Conclusion:  

Entire $ 6,50,000 will be capitalized in the books for the year ended 2018.