Chapter 10 Property, Plant, and Equipment (IAS 16)
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EXAMPLE 10.2 On January 1, 20X1, Zakharetz Inc. acquired production equipment in the amount of $250,000. The following further costs were incurred: $ Delivery
18,000
Installation
24,500
General administration costs of an indirect nature
3,000
The installation and setting-up period took three months, and an additional $21,000 was spent on costs directly related to bringing the asset to its working condition. The equipment was ready for use on April 1, 20X1. Monthly managerial reports indicated that for the first five months, the production quantities from this equipment resulted in an initial operating loss of $15,000 because of small quantities produced. The months thereafter showed much more positive results. The equipment has an estimated useful life of 14 years and a residual value of $18,000. Estimated dismantling costs are $12,500. What is the cost of the asset and what are the annual charges in the Statement of Comprehensive Income related to the consumption of the economic benefits embodied in the assets?
EXPLANATION Historical cost of equipment $ Invoice price Delivery
250,000 18,000
Installation
24,500
Other costs directly related to bringing the asset to its working condition
21,000
Initial estimate of dismantling costs
12,500 326,000
Annual charges related to equipment $ Historical cost
326,000
Estimated residual value
(18,000)
Depreciable amount
308,000
The annual charge to the Statement of Comprehensive Income is $22,000 ($308,000 á 14 years). However, note that in the year ending December 31, 20X1, the charge will be $16,500 (9/12 ⳯ $22,000), because the equipment was ready for use on April 1, 20X1, after the installation and setting-up period.