ABC Ltd. is installing a new plant at its production facility.
Information:
Cost of the plant (cost as per supplier's invoice): 31.25
Estimated dismantling costs to be incurred after 5 years: 2.50
Initial operating losses before commercial production: 3.75
Initial delivery and handling costs: 1.85
Cost of site preparation: 4.50
Consultants used for advice on the acquisition of the plant: 6.50
You are required to compute the costs that can be capitalised for the plant by ABC Ltd in accordance with AS 10: Property, Plant and Equipment. (RTP November 20)
Answer (2)
To compute the costs that can be capitalized for the plant by ABC Ltd in accordance with AS 10: Property, Plant and Equipment, we need to identify which of the expenses listed are directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. Let's evaluate each cost item:
Cost of the plant (cost as per supplier's invoice) : $31.25 million. This is the purchase price and is capitalized as part of the cost of the plant.
Estimated dismantling costs to be incurred after 5 years : $2.50 million. Under AS 10, these costs should be included in the cost of the asset if an entity has an obligation when the asset is purchased. Therefore, they are capitalized.
Initial operating losses before commercial production : $3.75 million. These costs are generally not capitalized, as they do not bring the asset into working condition but rather are part of the costs incurred after the asset is ready for use.
Initial delivery and handling costs : $1.85 million. These costs are directly associated with getting the asset to its location and ensuring it is ready for use, thus they are capitalizable.
Cost of site preparation : $4.50 million. Since site preparation is necessary to install the plant, these costs can be capitalized.
Consultants used for advice on the acquisition of the plant : $6.50 million. Consulting fees related to the acquisition and installation of the asset are capitalizable if they directly lead to bringing the asset into its working condition.
Calculation of Total Capitalized Costs:
Plant Cost: $31.25 million
Dismantling Costs: $2.50 million
Delivery and Handling Costs: $1.85 million
Site Preparation Costs: $4.50 million
Consulting Fees: $6.50 million
Total Capitalized Costs = 31.25 + 2.50 + 1.85 + 4.50 + 6.50 = 46.60 million
Therefore, the total costs that can be capitalized for the plant by ABC Ltd amount to $46.60 million.
The total costs that can be capitalized for ABC Ltd's new plant, following AS 10 guidelines, amounts to $46.60 million. This includes costs for the plant itself, dismantling, delivery, site preparation, and consultancy fees. Initial operating losses are not capitalized as they do not assist in preparing the asset for use.
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