Blog: MGT401 Assignment 01 Solution 2 Spring 2013

Question # 1 :
1)     Journal entries to record:

Part (a)
Borrowing cost on the plant to capitalize
Answer:

In this case history the specific loan amount = 14,000,000
The rate of interest = 20 % p.a
The loan obtained = 1^st April, 2004
Since, ISA 23 says “The Capitalization of borrowing costs should begin when three events or transactions took place.

• Expenditure on assets are being incurred.
• Activities that are necessary to prepare the asset its intended use are in progress.
• Borrowing costs are being incurred.

So, capitalization shall start from August 1^st,2004 and return on deposit ( 14%p.a) shall not be subtracted from Capitalized borrowing cost period for Capitalization.

• 1^st Aug 2004 to 30 Sep 2004 (2 month)
• 1^st Jan 2005 to 31 Aug 2005 (8 month)
• Total 10 month.

Now, According to IAS 23 says that “ Capitalization of borrowing costs should be suspended if :

• Active development  of the assets is suspended for an extended period.
• Suspension of capitalization of borrowing costs in not necessary for temporary delays or for period when sustainable technical or administrative work is taking place.

So, Suspension Period:

3 months only:

Now:

Interest to be capitalized = 14,000,000*20/100*10/12 =  2,333,333
Cost = 20 million + 2,333,333
Total cost = 20,333,333

Journal Entries:

Particular                                  Dr.                                   Cr.

Plan                                    2,333,333
Borrowing Cost                                                              2,333,333


Particular                                           Dr.                                          Cr.

Plant                                             20,000,000
Borrowing Cost                                                                  20,000,000

Part (b)
Initial plant cost to recognize
Answer:
Initial plant cost = 20 million

Part (c)
 Depreciation expense for the first year
Answer:
Deprection expense = Cost/years
cost = 22,333,333
years = 10
depreciation expense = 22,333,333/10
deprection expense = 2,233,333

Journal Entry:
Particular                                      Dr.                                    Cr.

Depreciation                              2,233,333
Accumulated depreciation                                             2,233,333

Question # 2 :

 Prepare depreciation schedule for the initial 5 years.

Answer:
As on         Addition/ as on
Jan, 01           dletion Dec, 31
Year                                                        cost                                                   rate
2005   22,333,333                          22,333,333                                              10%
2006   22,333,333                          22,333,333                                              10%
2007   22,333,333                          22,333,333                                              10%
2008   22,333,333                          22,333,333                                              10%
2009   22,333,333                          22,333,333                                               10%

Accumulated Depreciation                                                                             WDV
As on                            Addition/                     Charge of                            As on
Jan,01                          Deletion                       the year                              Dec,31

0                                   2,233,333                    2,233,333                          20,100,000
2,233,333                     2,233,333                    4,466,666                          17,866,667
4,466,666                     2,233,333                    6,699,999                          15,633,334
6,699,999                     2,233,333                     8,933,332                         13,400,001
8,933,332                     2,233,333                    11,166,665                         11,166,668
Question # 3:
 Plant value to be reported at the balance sheet as on 31/12/2005
Answer:
Cost = 22,333,333
Depreciation = (2,233,333)
Book value = 20,100,000
Now, Fair Value (fv) 25 million which is more than Book value so no impairment would be charged and plant value to be reported at the balance sheet as on 31/12/2005.