Plant , property and equipment

Case study
Q 1. AD Softex (India) Ltd. expects that a plant has become useless which is appearing in the books at Rs. 10
lakhs gross value. The company charges SLM depreciation on a period of 10 years estimated life and estimated
scrap value of 3%. At the end of 7th year the plant has been assessed as useless. Its estimated net realizable value
is Rs. 3,10,000. Determine the loss/gain on retirement of the fixed assets.
Solution: Cost of the plant Rs. 10,00,000
Estimated realizable value Rs. 30,000
Depreciable amount Rs. 9,70,000
Depreciation per year Rs. 97,000
Written down value at the end of 7th Year = 10,00,000-(97,000X7) =
Rs. 3,21,000
As per accounting for fixed assets , items of fixed assets that have been retired from active use and are held for
disposal are stated at the lower of their net book value and net realizable value and are shown separately in the
financial statements. Any expected loss is recognized immediately in the profit and loss statement. Accordingly,
the loss of account and asset of Rs. 11,000 (321000-310000) to be shown in the profit and loss account and
asset of Rs. 3,10,000 to be shown in the balance sheet separately.
Q 2. A company has purchased plant and machinery in the year 2006-07 for Rs. 45 lakhs. A balance of Rs. 5
lakhs is still payable to the suppliers for the same. The supplier waived off the balance amount during the
financial year 2009-10. The company treated it as income and credited to profit and loss account during 200910.
Whether accounting treatment of the company is correct. If not, state with reasons.
Solution: As per accounting for fixed asset, the cost of fixed assets may undergo changes subsequent to its
acquisition or construction on account of exchange fluctuation, price adjustments, changes in duties or similar
factors. Considering the treatment done by the company is not correct. Rs. 5 lakhs should be deducted from the
cost of fixed assets.
Q3. On March 31, 2010, Winn Company traded in an old machine having a carrying amount of Rs. 16.800, and
paid cash difference of Rs. 6,000 for a new machine having a total cash price of Rs. 20,500. On March 31,
2010, what amount of loss should Winn Company recognize on this exchange?
Solution: As per the accounting standard ,when a fixed asset is acquired in exchange for another asset, the cost
of the asset acquired should be recorded either at fair market value or at the net book value of the asset given
up, adjusted for any balancing payment or receipt of cash or other consideration. The cash price of the new
machine represents its fair market value (FMV). The FMV of the old machine can be determined by subtracting
the cash portion of the purchase price (Rs. 6,000) from the total cost of the new machine. Rs. 20,500 Rs.
14,500. Since the book value of the machine (Rs. 16,800) exceeds its FMV on the date of the trade in (Rs.
14,500), the difference of Rs. 2,300 must be recognized as a loss, however, if the FMV of the old machine had
exceeded its book value, the gain would not be recognized.
Q 4. A building suffered uninsured fire damage. The damaged portion of the building was refurbished with
higher quality materials. The cost and related accumulated depreciation of the damaged portion are identifiable.
To account for these events, the owner should
(a) Reduce accumulated depreciation equal to the cost of refurbishing.
(b) Record a loss in the current period equal to the sum of the cost of refurbishing and the
carrying amount of the damaged portion of the building.
(c) Capitalize the cost refurbishing and record a loss in the current period equal to the

carrying amount of the damaged portion of the building.

(d) Capitalize the cost refurbishing by adding the cost to the carrying amount of the
building.
Solution: (c) When an entity suffers a casualty loss to an asset: the accounting loss is recorded at the net
carrying value of the damaged asset, if known. In this case, the cost and related accumulated depreciation are
identifiable. The entity should therefore recognize a loss in the current period equal to the carrying amount of
the damaged portion of the building. The refurbishing of the building, which is an economic event separate from
the fire damage, should be treated similarly as the purchase of other assets or betterments. The cost of
refurbishing the building should therefore be capitalized and depreciated over the shorter of the refurbishments
useful lives or the useful life of the building.
Loss
Acc. Depreciation
To Building

Dr.
Dr.

Building
Cash

Dr.

Therefore, answer (c) is correct and answer (b) is incorrect. Answer (a) is incorrect because in order to reduce
the accumulated depreciation account, the useful life of the asset must be extended. In this case, there is no
mention of this fact. Answer (d) is incorrect because it fails to recognize the casualty loss and properly remove
the cost and accumulated depreciation on the damaged portion of the building from the accounting records.
Q 5. Rawat & Co. Ltd. incurred costs to modify its building and to rearrange its production line. As a result, an
overall reduction in production costs is expected. However, the modifications did not increase the buildings
market value, and the rearrangement did not extend the production lines life.
Should the building modification costs and the production line rearrangement costs be capitalized?
Building modification costs
Production line rearrangement costs
(a)
Yes
No
(b)
Yes
Yes
(c)
No
No
(d)
No
Yes
Solution: Only expenditure that increase the future benefits from the existing asset beyond its previously
assessed standard of performance is included in the gross book value ,e.g an increase in capacity. In this case
future benefits from the existing asset appear to have increased beyond its previously assessed standard of
performance as there is over all reduction in production cost which is expected. Therefore both the building
modification and production cost which is expected. Therefore both the building modification and production
line rearrangement contributed to the improved efficiency in the production process. Therefore, both costs
should be capitalized and answer (b)is correct.
Q.6 . One customer from whom Rs. 5 lakhs are recoverable for credit sales given a motor car in full settlement
of dues. The directors estimate that the market value of the motor car transferred is Rs. 5.25 lakhs. As on the
date of the balance sheet the car has not been registered in the name of the auditee. As an auditor, what would
you do in this situations.?
Solution: The motor car has been acquired in exchange for another assets i.e receivables. The fair value of
motor car is Rs. 5.25 lakhs and that of receivable Rs. 5 lakhs . As per this standard the asset acquired in an
exchange of assets should be valued at the fair market value of assets acquired or the asset given up, whichever
is more clearly evident. Here fair market value of the assets given up obviously more clearly evident. Hence, the
motor car should be valued at Rs. 5 lakhs . also the motor car should be recognized as an asset even though it is

not yet registered in auditees name. this is because legal title is not necessary for an asset to exist. What is
necessary is controls as per the framework for preparation and presentation of financial statement s. Applying
substance over from we find since price has been settled ,the auditee has control, hence it should be reflected as
an asset along with a note to the effect that the registration in auditee name is pending.
Q.7. A publishing company undertook repair and overhauling of its machinery at a cost of Rs. 2.50 lakhs to
maintain them in good condition and capitalized the amount , as it is more than 25 % of the original cost of the
machinery .As an auditor , what would you do in this situations ?
Solution: Size of the expenditure is not the criteria to decide whether subsequent expenditure should be
capitalized. The important question is whether the expenditure increases the expected future benefits from the
asset beyond its pre assessed standard of performance as per the accounting standard .only then it should
capitalize. Since in this case ,only the benefits are maintained at existing level, the expenditure should not be
capitalized .If under the circumstance the amount is material the auditor should qualify his report.
Q.8. Is project under sale fixed or current asset ?
Solution: According this accounting standard , accounting for fixed assets. Fixed assets retired from active use
and held for disposal should be stated at the lower of their net book value and net realizable value and shown
separately in the financial statements.
In view of the above, the ASB opined that project under sale, which was originally treated, as fixed asset would
continue to be fixed asset even if it is under sale and will not, therefore, be classified as a current asset.
However, if an enterprise were a dealer of projects ,then the project under sale would be an inventory and will
be classified as a current asset .
Q9. J Ltd. purchased machinery from K Ltd. on 1-5-2013. The price was 370.44 lakhs before charging 8% sales
tax and giving a trade discount of 2% on the quoted price. Transport charges were 0.25% on the quoted price
and installation charges come to 1% on the quoted price.
A loan of Rs. 300 lakhs was taken from the bank on which interest at 15% per annum was to be paid on the date
of purchase 01-05-2013. Expenditure incurred on the trial run was Material Rs. 35,000, wages Rs. 25,000 and
Overheads Rs. 15,000.
Machinery was ready for use on 01.02.2014. However it was actually put to use only on 01-05-2014. Find out
the cost of the machine
Solution

Calculation of cost of Machine

Price of machine
Less: Trade discount 2%
Add: Sale Tax 8%
Transport Charges 0.25% on Rs. 370.44
Installation Charges 1% of Rs. 370.44
Calculation of borrowings cost01-05-2013 to 31-01-2014
300 X 15 / 100 X 2 / 12
Add: Expenses on trial run
Total Cost

(Rupees in Lakhs)
370.44
7.41
363.03
29.04
392.07
0.93
3.70
396.70
33.75
430.45
0.75
431.12