Chapter 5: Property, plant and equipment

Comprehension questions

1. What assets constitute property, plant and equipment?

2. What are the recognition criteria for property, plant and equipment?

4. How is cost determined?

8. How is useful life determined?

Application and analysis questions

Exercise 5.1

Revaluation adjustments and reversals

On 1 January 2022, Lima Ltd revalued land from $200 000 to $400 000. On 1 January
2023, the company subsequently revalued the land to $320 000. And on 1 January 2024,
the company again revalued the asset downwards to $160 000.

Required
1. Prepare the journal entries required to record the revaluation adjustment for the
year ended 30 June 2022.
2. Prepare the journal entries required to record the revaluation adjustment for the
year ended 30 June 2023.
3. Prepare the journal entries required to record the revaluation adjustment for the
year ended 30 June 2024.

Exercise 5.4

Purpose of depreciation

Recently Sea Eagle Ltd experienced a strike that affected a number of its operating
plants. The group accountant of Sea Eagle Ltd indicated that it was not appropriate to
report depreciation expense during this period as the equipment was not used during
the strike. She stated that during the strike the equipment did not depreciate and an
inappropriate matching of costs and revenues would result if depreciation were
charged. She based her position on the following points.
 Chapter 5: Property, plant and equipment

1. It is inappropriate to charge the period with costs for which there are no related
revenues arising from production.
2. The basic factor of depreciation in this instance is wear and tear, and because the
equipment was idle, no wear and tear occurred.

Required
You are a part of the auditing team that analyses the accounts of Sea Eagle Ltd. Write a
report to your supervisor in relation to the views of the group accountant of Sea Eagle
Ltd. (LO5)

Exercise 5.8

Determination of cost

Galah Ltd has acquired a new building. Assess which of the following items should be
included in the cost of the building. Provide a reason for your conclusions.
1. Stamp duty
2. Real estate agent’s fees
3. Architect’s fees for drawings for internal adjustments to the building required to be
made before use
4. Interest on the bank loan to acquire the building, and an application fee to the bank
to get the loan, which is secured on the building
5. Cost of changing the name on the building
6. Cost of changing the parking bays
7. Cost of refurbishing the lobby to the building to attract customers and make it more
user friendly

Exercise 5.15

Calculation of depreciation

On 1 July 2022, Eagle Airlines acquired a new aeroplane for a total cost of $20 million. A
breakdown of the costs to build the aeroplane was given by the manufacturers.

Aircraft body $6 000 000

Engines (2) 8 000 000
Fitting out of aircraft:

Seats 2 000 000

Carpets 100 000
Electrical equipment:

Passenger seats 400 000

Cockpit 3 000 000
Food preparation equipment 500 000

All costs include installation and labour costs associated with the relevant part.

© John Wiley and Sons Australia Ltd, 2020 5.2

It is expected that the aircraft will be kept for 10 years and then sold. The main value of
the aircraft at that stage is the body and the engines. The expected selling price is $4.2
million, with the body and engines retaining proportionate value.

Costs in relation to the aircraft over the next 10 years are expected to be as follows.

(a) Aircraft body. This requires an inspection every 2 years for cracks and wear and tear,
at a cost of $20 000.
(b) Engines. Each engine has an expected life of 4 years before being sold for scrap. It is
expected that the engines will be replaced in 2026 for $9 million and again in 2030 for
$12 million. These engines are expected to incur annual maintenance costs of $600
000. The manufacturer has informed Eagle Airlines that a new prototype engine with
an extra 10% capacity should be on the market in 2028, and that existing engines
could be upgraded at a cost of $2 million.
(c) Fittings. Seats are replaced every 3 years. Expected replacement costs are $2.4 million
in 2025 and $3 million in 2031. The repair of torn seats and faulty mechanisms is
expected to cost $200 000 p.a. Carpets are replaced every 5 years. They will be
replaced in 2028 at an expected cost of $130 000, but will not be replaced again before
the aircraft is sold in 2032. Cleaning costs amount to $20 000 p.a. The electrical
equipment (such as the TV) for each seat has an annual repair cost of $30 000. It is
expected that, with the improvements in technology, the equipment will be totally
replaced in 2028 by substantially better equipment at a cost of $700 000. The electrical
equipment in the cockpit is tested frequently at an expected annual cost of $500 000.
Major upgrades to the equipment are expected every 2 years at expected costs of $500
000 (in 2021), $600 000 (in 2023), $690 000 (in 2025) and $820 000 (in 2030). The
upgrades will take into effect the expected changes in technology.
(d) Food preparation equipment. This incurs annual costs for repair and maintenance of
$40 000. The equipment is expected to be totally replaced in 2028.
Required
1. Discuss how the costs relating to the aircraft should be accounted for with respect to
each of the following.
(a) Aircraft body
(b) Engines
(c) Fittings
(d) Food preparation equipment
2. Determine the expenses recognised for the 2022–23 financial year.

© John Wiley and Sons Australia Ltd, 2020 5.3

 Chapter 5: Property, plant and equipment

© John Wiley and Sons Australia Ltd, 2020 5.4