Question

1) Explain requirements of IAS16 in relation to revaluation of PPE and
the treatment of surpluses and deficits on revaluation.
2) “K” is reviewing the file relating to a sophisticated oven that is used to
heat cell cultures to a precisely controlled temperature:
$
(i) List price paid to supplier 50 000
(ii) Wages and materials costs associated with testing
and calibrating oven, up to start of operations 800
(iii) Ongoing wages and materials costs associated with
calibrating oven since start of operations 2 000
(iv) Expected costs of disposing of oven at the end
of its useful life 16 000
The oven is used to heat cell cultures to a temperature range that must be
closely controlled.
The oven’s controls will have to be regularly checked and calibrated
throughout its working life. The oven will have to be dismantled and
sterilised by an expert contractor at the end of its life and then disposed
of at a special facility. “K” has already provided $16,000 against these
costs
.The machine’s expected useful life is 5 years. “K” is planning to adopt the
straight-line basis of depreciation. The market value/value in use of the
machine at the year end is $28 000. This decrease in value from new is
partly because the oven has been used to culture dangerous organisms,
and so it is much less valuable. “K” is unsure whether to value equipment
at cost less depreciation or at valuation. This decision will be based on
an analysis of the resulting figures in terms of two of the qualitative
characteristics of accounting statements (those of relevance and
reliability).

Required
(a) Calculate the cost of the oven, applying the requirements of IAS 16.
Explain your treatment of items (ii), (iii) and (iv).
(b) Calculate the figures that will appear in respect of the oven in the
statement of comprehensive income for the enterprise’s first year and
the statement of financial position at the year end under both the historical
cost and valuation bases, then discuss the relevance and reliability of
both sets of figures you have calculated in the answer.

Answer 1

Question No. a

Calculation of Cost of Oven as per IAS -16
Particulars	Amount($)
List Price paid to Supplier	$ 50,000.00
Wages and materials cost associated with testing and calibrating oven, up to start of operations	$      800.00
Ongoing wages and materials costs associated with calibrating oven since the start of operations	$               -
Expected Cost of Disposal	$ 16,000.00
Cost of Oven as per IAS -16	$ 66,800.00

Any expenditure incurred on Asset after the commencement of its operations shall be charged to Income Statement

Question No. b

Statement of Comprehensive Income Under Historical Method
Particulars	Amount($)
Revenue
Less: Operating Expenses
Wages and Material	$         2,000
Depreciation Expense (66800/5)	$       13,360
Statement of Comprehensive Income Under Revaluation Method
Particulars	Amount($)
Revenue
Less: Operating Expenses
Wages and Material	$         2,000
Depreciation Expense (66800/5)	$       13,360
Loss on Revaluation [(66800 - 13360)-28000]	$       25,440

Under Historical Cost Method, the asset is carried at cost less accumulated depreciation and impairment

whereas under the Revaluation method, the asset is carried at a revalued amount, being its fair value at the date of revaluation less subsequent depreciation and impairment.