PROBLEMS AND SOLUTIONS

1. The price paid for machine is Rs. 1,10,000 (Rs 1,00,000 plus GST of 10000). The entity
gets a credit of Rs 10,000 while calculating the tax payable on the finished goods sold.
Additional costs are freight Rs 2000, import duty Rs 5000, installation expenses Rs 100.
The initial estimate of dismantling and removing the item is Rs 3000. After the machine
was put to use, Rs 1500 was spent for maintenance. Calculate the initial cost of the asset
and justify your reasons as per IAS 16.
Solution:

Computation of Initial Value of an Asset

Particulars Rs. Rs.
Purchase Price 110000
(-) Refundable Tax 10000 100000
(+) Import Duty 5000
(+) Directly Attributable Cost
Freight Charges 2000
Installation Exp 100 2100
(+) Dismantling Cost 3000

Initial Cost of the Asset 1,10,100

 Maintenance charges of Rs. 1500 are to be shown as an expense in the SOPL,
and not as an asset.

2. X Itd. ordered a laptop on flip kart. The price of laptop is Rs. 40,000, allowed 10%
discount at time of purchase & charged 12% GST which is not refundable. Shipping
charges Rs. 500, software installation charges Rs. 2,000 and annual service charges Rs.
3,000. Calculate the initial cost of laptop & give reason as per IAS 16.

Solution:

Computation of Initial Value of an Asset

Particulars Rs. Rs.
Purchase Price 40000
(-) Discount (10%) 4000 36000
(+) GST (12% on 36000) 4320
(+) Directly Attributable Cost
Shipping Charges 500
Software Installation Charges 2000
Initial Cost of the Asset 42820

 Annual service charges of Rs 3000 to be shown as an expense in the SOPL, and

not as an asset.

3. AZ Ltd is installing a new plant has incurred the following cost:

 Cost of plant (cost per supplier’s invoice plus taxes) Rs. 21,00,000, Initial delivery and
handling cost Rs.1,00,000, cost of site preparation Rs. 1,00,000, consultant used for
advice on acquisition of the plant Rs.1,30,000, interest charges paid to suppliers of the
plant for deferred credit Rs. 70,000, estimated dismantling cost to be incurred after six
years Rs. 2,00,000. Which of these costs can is capitalized as part of PPE in accordance
with IAS 16?
Solution:

Computation of Initial Value of an Asset

Particulars Rs. Rs.
Purchase Price 2100000
(+)Import duty or GST - 2100000
(+)Directly Attributable Cost
Site Preparation Cost 100000
Initial Delivery Cost 100000
Consultant fee 130000
Dismantling Cost 200000

Initial Cost of the Asset 2630000

 Interest Rs. 70000 paid to suppliers for deferred credits is a revenue expenditure
and recognized in SOPL as expenses of the year.

4. An asset costing Rs. 1, 00,000 and having expected life of 10 years was purchased by A
ltd. It was intended to be used for 6 years at the end of which it’s expected residual value
is 40,000. What is the depreciable amount?

Solution:
Depreciation = Cost of the Asset – Residual Value
Life of the Asset
= 100000 – 40000 = 6
=60000 / 6
= 10000/- (Depreciaton)
5. An asset was purchased for Rs. 200000 on 01st Jan 2014 and is being depreciated on
straight line basis over its life of 5 years. A review of its useful life was taken and the
estimated life was revised to 8 years as on 1st Jan 2016. What is the depreciation charge
for the year ended Dec 2014? Pass the journal entries till 31 Dec 2016.
Solution:
Dep = Cost of an Asset – RV 1st Year – 31st Dec 2014
Life of an Asset Amount – 200000
(-) Dep – 40000
 In case of 5 years 160000
o 200000 / 5 = 40000
2nd Year – 31st Dec 2015
 In case of 8 years = (Remaining 6 yrs) Carrying Amount – 160000
o 120000 / 6 = 20000
(-) Dep - 40000
(end of the second year carrying amount is 1,20,000)
120000
3rd Year – 31st Dec 2016
Carrying Amount – 120000
(-) Dep - 20000
1,00,000

Journal Entries in the books of company

01-Jan-2014 PPE A/c – Dr. 200000

To Cash A/c 200000
(Being Asset Purchased)

31-Dec-2014 Depreciation A/c – Dr. 40000

To Accumulated Depreciation A/c 40000
(Being Dep charged and recorded)

31-Dec-2015 Depreciation A/c – Dr. 40000

To Accumulated Depreciation A/c 40000
(Being Dep charged and recorded)

31-Dec-2016 Depreciation A/c – Dr. 20000

To Accumulated Depreciation A/c 20000
(Being Dep charged and recorded)