Question

Lawrence Ltd purchased a plant and incur following cost Purchase price 400,000 Sale tax Refundable (17%) 68,000 Import duties - non-refundable 80,000 Fuel (incurred while transporting the plant to the factory) 20,000 Administration costs 15000 Staff party to celebrate the acquisition of the new plant 30,000 Staff training 60,000 Testing to ensure plant fully operational before start of production 43,000 Proceeds from sale of samples and by-products that were produced during testing 21,000 Advertising of the ‘amazing widgets’ to be produced by the new plant 48,000 Initial operating loss 15,000 Useful life of the plant is 10 years with 50,000 residual value Requirement  Calculate the cost at which plant is capitalized  Pass journal entries to recognize the cost of plant and depreciation

Answer 1

Given information

Useful life of the Plant = 10 years

Residual value = 50,000

Item	Amount
Purchase price of the plant	400,000
Sales tax - refundable (17%)	68,000
Import duties - non-refundable	80,000
Fuel (incurred while transporting the plant to the factory)	20,000
Administration costs	15,000
Staff party to celebrate the acquisition of the new plant	30,000
Staff training	60,000
Testing to ensure plant fully operational before start of production	43,000
Proceeds from sale of samples and by-products	21,000
Advertising of the ‘amazing widgets’	48,000
Initial operating loss	15,000

1. Calculation of cost of the plant to be capitalized:

As per IAS 16, An item of property, plant and equipment is initially measured at its cost. Cost includes:

• its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates;
• any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management; and
• the estimated costs of dismantling and removing the item and restoring the site on which it is located, unless those costs relate to inventories produced during that period.

Item	Capitalized Cost	Cost not to be included
Purchase price of the plant	400,000
Sales tax - refundable (17%)		68,000
Import duties - non-refundable	80,000
Fuel (incurred while transporting the plant to the factory)	20,000
Administration costs		15,000
Staff party to celebrate the acquisition of the new plant		30,000
Staff training	60,000
Testing to ensure plant fully operational before start of production	43,000
Proceeds from sale of samples and by-products	(21,000)
Advertising of the ‘amazing widgets’		48,000
Initial operating loss		(15,000)
Total	582,000	146,000

NOTE:

1. Sales tax - refundable (17%) - will not form part of Plant cost, since these costs are refundable.

2. Administration costs - will not form part of Plant cost, as these costs are not directly attributable to the Plant. These costs are allocated to the company as a whole.

3. Staff party to celebrate the acquisition of the new plant - will not form part of Plant cost, as these costs are not directly attributable to the Plant.

4. Advertising of the ‘amazing widgets’ - will not form part of Plant cost, as these costs are not directly attributable to the Plant.

5. Initial operating loss - will not form part of Plant cost, since these is incurred after plant is put to use.

2. Calculation of Depreciation on Plant using Straight-line method:

Total cost of the Plant = 582,000

Useful life of Plant = 10 years

Residual value = 50,000

Depreciation Expense = (Cost of Plant - Residual Value) / Useful life of Plant

= (582,000 - 50,000) / 10 years = 53,200 for eachh year

3. Jouranl entry to record the Cost of the Plant and depreciation:

Journal entry to capitalize the cost of Plant:

Date	Accounts Title and Explanation	Debit (Dr.)	Credit (Cr.)
Now	Plant A/c Dr...	582,000
	To Cash A/c Cr....		582,000
	(Being cost of plant capitalized)

Journal entry to record the depreciation expense:

Date	Accounts Title and Explanation	Debit (Dr.)	Credit (Cr.)
Year 1	Depreciation Expense A/c Dr...	53,200
	To Plant A/c Cr....		53,200
	(Being depreciation expense recorded for Year 1)

Journal entry to transfer the depreciation expense to Profit and loss A/c:

Date	Accounts Title and Explanation	Debit (Dr.)	Credit (Cr.)
Year 1	Profit and loss A/c Dr...	53,200
	To Depreciation Expense A/c Cr....		53,200
	(Being transfer the depreciation expense to Profit and loss A/c)