Blog: MGT401 Assignment 01 Solution 3 Spring 2013

Financial accounting-ii (mgt401)            ASSIGNMENT NO. 01

Required:
(1)   Journal entries to record:
a)      Borrowing cost on the plant to capitalize;                               (5 Marks)
b)      Initial plant cost to recognize;                                                            (3 Marks)
c)      Depreciation expense for the first year; &                              (4 Marks)

(2)   Prepare depreciation schedule for the initial 5 years.                    (5 Marks)

(3)   Plant value to be reported at the balance sheet as on 31/12/2005             (3 Marks)

Solution
Specific Loan Amount = 14,000,000 Rs
Rate of interest = 20% p. a
Loan obtained = 1^st April, 2004
Since IAS 23 says
Borrowing costs include interest on bank overdrafts and borrowings, amortization of discounts or premiums on borrowings, finance charges on finance leases and exchange differences on foreign currency borrowings where they are regarded as an adjustment to interest costs.


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

• 1^st Aug. ,2004 to 30, September ,2004  (2month)
• 1^st January 2005 to 31 Aug. 2005 (8 Month)

So
2 + 8 month = 10 month
We know that
According to IAS 23 says that

Active development of the asset is suspended for an extended period if capitalization of borrowing costs should be suspended.
So suspension period:
 3 month only
Interest to be capitalized: 14,000,000 * 20 /100 * 10/12 = 2,333,333
                    Cost = 20,000,000 + 2333, 333= 22,333,333
So journal entries written as
Particular                        Dr.                                        Cr.
   Plant                           2,333,333/-
    Borrowing Cost                                                     2,333,333/-

Particular                        Dr.                                        Cr.
   Plant                           20,000,000/-
        Bank                                                                20,000,000/-

Answer Part (b)

Initial Plant cost to recognize:
So here
Initial plant cost = 20 million =20,000,000
(c)
Depreciation expense for the 1^st year:
Depreciation expense for the 1^{st year:} cost /10 year
Depreciation expense for the 1^st year: 22,333,333/10
Depreciation expense for the 1^st year: 2,233,333
Initial plant cost is = 22, 33,333 Answer

Journal entry

Particular                        Dr.                                        Cr.
   Depreciation                           2,233,333/-
    Accumulated depreciation                                        2,233,333/-


Prepare Depreciation Schedule for the initial 5 year.

Years		Cost		Rate	Accumulated depreciation				WDV
	As on January ,01	Add. /Del.	Dec,31		Jan,01	Add /Del.	Charge of the year	As on Dec ,31
2005	22,333,333	-	22,333,333	10%	0	-	2,233,333	22,33,333		20,100,000
2006	22,333,333	-	22,333,333	10%	22,33,333	-	2,233,333	4,466,666		17,866,667
2007	22,333,333	-	22,333,333	10%	4,466,666	-	2,233,333	6,699,999		15,633,334
2008	22,333,333	-	22,333,333	10%	6,699,999	-	2,233,333	8933.332		13,400,001
2009	22,333,333	-	22,333,333	10%	8,933,332	-	2,233,333	11,166,665		11,166,668

                                     
(3)
(4)   Plant value to be reported at the balance sheet as on 31/12/2005             (3 Marks)
Cost    =       22,333,333
Depreciation =       2,233,333
Book Value=         20,100,000
 Now: fair Value 25 Million which is more then book Value So no Impairment would be change and plant value to be reported at the balance sheet as on 31/12/2005.