Question

Q2. (a) On 1 January 2014, KimBell Bhd acquired a bulk plant and equipment from Sun Bhd. The economic life was estimated to be 20 years at a cost of RM4.8 million. In addition, at the date, KimBell Bhd also incurred import duties and freight charges amounting to RM300,000 as well as an installation cost of the plant and equipment of RM220,000. KimBell closes its account every 31 December. The plant and equipment was depreciated on a straight line basis. The following subsequent expenditures were incurred during the year ended 31 December 2019 by KimBell Bhd regarding the plant and equipment:

 Service cost of RM53,800 per annum to maintain the plant.

 On 1 January 2019, KimBell replaced one of the parts that were severely damaged. Although there was no change in production volume, the change has resulted in significant reduced of cost. The carrying amount of the old component as at that date was RM36,000. New part cost RM55,000.

 On 31 December 2019, an old component which has carrying amount of RM136,000 was replaced with the new component. The purchase of the new component worth RM 255,000.

Required: Advice KimBell on appropriate accounting treatment for each of the subsequent expenditure stated above. You are also required to indicate the depreciation charged during the year ended 31 December 2019.

Answer 1

Service Cost of 53800

This is normal repair maintenance expense to be charged to Income Statement

Part Damaged replacement on 1st January,2019

Generaly repairs are not capitalized but in this case the replacement has resulted in significant cost reductions i.e.usefulness and efficiency of the equipment has increased hence this will have to be capitalized.The increase in value would be 19000 (55000-36000) and hence depreciation charges will also change accordingly from 2019 till end of life i.e for rest 15 years of balance life.

Part Damaged replacement on 31st December,2019

This will be charged to Income statment as Repairs expense as there is no impact in the usefulness of the equipment.

Depreciation for 2019:

Asset Cost Table

Depreciation Till 2018 end

Value to be depreciated in balance 15 years starting 2019 :

3990000 + 19000 = 4009000

Balance Life - 15 years

Revised Depreciation per year - 4009000 / 15 = 267267