INDIGOLEARN

AS 10
Property, Plant & Equipment [Q&A]

AS – 10 Q&A INDIGOLEARN PAGE 1

Illustration 1

Entity A, a supermarket chain, is renovating one of its major stores. The store will
have more available space for in store promotion outlets after the renovation and
will include a restaurant. Management is preparing the budgets for the year after
the store reopens, which include the cost of re-modelling and the expectation of a
15% increase in sales resulting from the store renovations, which will attract new
customers. State whether the re-modelling cost will be capitalized or not.

Solution

The cost of an item of PPE should be recognised as an asset if, and only if:

(a) It is probable that future economic benefits associated with the item will flow
to the enterprise, and

(b) The cost of the item can be measured reliably.

The expenditure in re-modelling the store will create future economic benefits (in
the form of 15% of increase in sales) and the cost of re-modelling can be measured
reliably, therefore, it should be capitalized.

Illustration 2

What happens if the cost of the previous part / inspection was / was not identified
in the transaction in which the item was acquired / constructed?

Solution

When each major inspection is performed, its cost is recognised in the carrying
amount of the item of PPE as a replacement, if the recognition criteria are satisfied.
Any remaining carrying amount of the cost of the previous inspection (as distinct
from physical parts) is derecognised.

De-recognition of the carrying amount occurs regardless of whether the cost of the
previous part/inspection was identified in the transaction in which the item was
acquired or constructed.

Illustration 3

Entity A has an existing freehold factory property, which it intends to knock down
and redevelop. During the redevelopment period the company will move its
production facilities to another (temporary) site. The following incremental costs
will be incurred –

1. Setup costs of Rs.5,00,000 to install machinery in the new location.

2. Rent of Rs.15,00,000

AS – 10 Q&A INDIGOLEARN PAGE 2

3. Removal costs of Rs.3,00,000 to transport the machinery from the old location
to the temporary location.

Can these costs be capitalized into the cost of the new building?

Solution

Any costs 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.

The costs to be incurred by the company are in the nature of costs of relocating or
reorganizing operations of the company and are not necessary for bring the asset to
the location and condition as intended by management. The costs to be incurred by
the company are in the nature of costs of relocating or reorganising operations of
the company and do not meet the requirement of AS 10 (Revised) and therefore,
cannot be capitalised.

Illustration 4

Entity A, which operates a major chain of supermarkets, has acquired a new store
location. The new location requires significant renovation expenditure. Management
expects that the renovations will last for 3 months during which the supermarket
will be closed. Management has prepared the budget for this period including
expenditure related to construction and re-modelling costs, salaries of staff who will
be preparing the store before its opening and related utilities costs. What will be
the treatment of such expenditures?

Solution

Management should capitalise the costs of construction and remodelling the

supermarket, because they are necessary to bring the store to the condition
necessary for it to be capable of operating in the manner intended by management.
The supermarket cannot be opened without incurring the remodelling expenditure,
and thus the expenditure should be considered part of the asset.

However, if the cost of salaries, utilities and storage of goods are in the nature of
operating expenditure that would be incurred if the supermarket was open, then
these costs are not necessary to bring the store to the condition necessary for it to
be capable of operating in the manner intended by management and should be
expensed.

Illustration 5

An amusement park has a 'soft' opening to the public, to trial run its attractions.
Tickets are sold at a 50% discount during this period and the operating capacity is
80%. The official opening day of the amusement park is three months later.

AS – 10 Q&A INDIGOLEARN PAGE 3

Management claim that the soft opening is a trial run necessary for the amusement
park to be in the condition capable of operating in the intended manner.
Accordingly, the net operating costs incurred should be capitalized. Comment.

Solution

Any costs 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
should be capitalised. Costs incurred after the asset is ready to use are not
capitalised.

Even though it is running at less than full operating capacity (in this case 80% of
operating capacity), there is sufficient evidence that the amusement park is capable
of operating in the manner intended by management. Therefore, these costs are
should be expensed as incurred.

Illustration 6

Entity A exchanges surplus land with a book value of Rs.10,00,000 for cash of
Rs.20,00,000 and plant and machinery valued at Rs.25,00,000. What will be the
measurement cost of the assets received?

Solution

When Property, Plant & Equipment is acquired in exchange of another asset and the
transaction has a commercial substance, the PPE acquired is measured at fair value.

The plant and machinery acquired in this case will be measured at Rs. 25,00,000.

*The value of land realized in this case is Rs. 45,00,000 [Plant and Machinery Rs.
25,00,000 and Cash Rs. 20,00,000]

Illustration 7

Entity A exchanges car X with a book value of Rs.13,00,000 and a fair value of
Rs.13,25,000 for cash of Rs.15,000 and car Y which has a fair value of Rs.13,10,000.
The transaction lacks commercial substance as the company’s cash flows are not
expected to change as a result of the exchange. It is in the same position as it was
before the transaction. What will be the measurement cost of the assets received?

Solution

When Property, Plant & Equipment is acquired in exchange of another asset and the
transaction has a commercial substance, the PPE acquired is measured at fair value.
If the transaction lacks commercial substance, the acquired items are measured at
book value of assets given up.

Book Value of Car X – Rs. 13,00,000

Less: Cash Received- Rs. 15,000

AS – 10 Q&A INDIGOLEARN PAGE 4

Value of Car Y = Rs. 12,85,000

Illustration 8

Entity A is a large manufacturing group. It owns a number of industrial buildings,

such as factories and warehouses and office buildings in several capital cities. The
industrial buildings are located in industry

ial zones, whereas the office buildings are in central business districts of the cities.
Entity A's management want to apply the revaluation model as per AS 10 (Revised)
to the subsequent measurement of the office buildings but continue to apply the
historical cost model to the industrial buildings. State whether this is acceptable
under AS 10 (Revised) or not with reasons?

Solution

A company can choose to apply cost model or revaluation model to measure PPE and
must apply a single policy to a class of PPE. A class of PPE is a grouping of assets of
a similar nature and use in operations of an enterprise.

The office buildings can be clearly distinguished from the industrial buildings in
terms of their function, their nature and their general location.AS 10 (Revised)
permits assets to be revalued on a class by class basis.

The different characteristics of the buildings enable them to be classified as

different PPE classes. The different measurement models can, therefore, be applied
to these classes for subsequent measurement. Hence, Entity A's management can
apply the revaluation model only to the office buildings.

However, all properties within the class of office buildings must be carried at
revalued amount.

Illustration 9

Entity A has a policy of not providing for depreciation on PPE capitalized in the year
until the following year, but provides for a full year's depreciation in the year of
disposal of an asset. Is this acceptable?

Solution

The depreciable amount of a tangible fixed asset should be allocated on a systematic

basis over its useful life. The depreciation method should reflect the pattern in
which the asset's future economic benefits are expected to be consumed by the
entity.

Useful life means the period over which the asset is expected to be available for use
by the entity. Depreciation should commence as soon as the asset is acquired and is
available for use. Thus, the policy of Entity A is not acceptable.

AS – 10 Q&A INDIGOLEARN PAGE 5

Illustration 10

Entity A purchased an asset on 1st January 2013 for Rs.1,00,000 and the asset had
an estimated useful life of 10 years and a residual value of nil. On 1st January 2017,
the directors review the estimated life and decide that the asset will probably be
useful for a further 4 years. Calculate the amount of depreciation for each year, if
company charges depreciation on Straight Line basis.

Solution

Particulars Amount in Rs
Depreciation for years 1-4 Rs.10000 x 4 = Rs.40,000
WDV at beginning of year 5 Rs.1,00,000- Rs.40,000 = Rs.60,000
Balance useful life 4 years
Depreciation for balance useful life Rs.60,000 / 5 = Rs.15,000 per year

Illustration 11

Entity B constructs a machine for its own use. Construction is completed on 1st
November 2016 but the company does not begin using the machine until 1st March
2017. Comment when should the entity start charging depreciation.

Solution

The entity should begin charging depreciation from the date the machine is ready
for use - that is, 1st November 2016.The fact that the machine was not used for a
period after it was ready to be used is not relevant in considering when to begin
charging depreciation.

Illustration 12

A property costing Rs.10,00,000 is bought in 2016. Its estimated total physical life is
50 years. However, the company considers it likely that it will sell the property after
20 years. The estimated residual value in 20 years' time, based on 2016 prices, is:

Case (a) Rs.10,00,000 Case (b) Rs.9,00,000.

Calculate the amount of depreciation.

Solution

Case a
Cost of Property Rs. 10,00,000
Less : Estimated Salvage Value Rs. 10,00,000
Depreciable Amount Nil
Depreciation Nil

AS – 10 Q&A INDIGOLEARN PAGE 6

 Case b
Cost of Property Rs. 10,00,000
Less : Estimated Salvage Value Rs. 9,00,000
Depreciable Amount Rs. 1,00,000
Useful Life 20 Years
Depreciation Rs. 1,00,000 / 20
= Rs. 5,000

Illustration 13

Entity A carried plant and machinery in its books at Rs.2,00,000. These were
destroyed in a fire. The assets were insured 'New for old' and were replaced by the
insurance company with new machines that cost Rs.20,00,000. The machines were
acquired by the insurance company and the company did not receive the
Rs.20,00,000 as cash compensation. State, how Entity A should account for the
same.

Solution

Entity A should account for a loss in the Statement of Profit and Loss on de-
recognition of the carrying value of plant and machinery in accordance with AS 10
(Revised).

Entity A should separately recognize a receivable and a gain in the income statement
resulting from the insurance proceeds under AS 29 (Revised) once receipt is virtually
certain. The receivable should be measured at the fair value of assets that will be
provided by the insurer.

Particulars Debit Credit

Profit & Loss Account Dr. 2,00,000
To Plant & Machinery Account 2,00,000
(Being loss on account of fire)
Insurance Company Account Dr. 20,00,000
To Profit & Loss Account 20,00,000
(Being claim settlement by insurance company)
Plant & Machinery Account Dr 20,00,000
To Insurance Company Account 20,00,000
(Being plant received from insurance company)

AS – 10 Q&A INDIGOLEARN PAGE 7

Illustration 14

ABC Ltd. is installing a new plant at its production facility. It has incurred these
costs:

# Particulars Amount(Rs.)
1 Cost of the plant (cost per supplier’s invoice plus taxes) 25,00,000
2 Initial delivery and handling costs 2,00,000
3 Cost of site preparation 6,00,000
4 Consultants used for advice on the acquisition of the plant 7,00,000
5 Interest charges paid to supplier of plant for deferred credit 2,00,000
6 Present Value Estimated dismantling costs to be incurred after 7 3,00,000
years
7 Operating losses before commercial production 4,00,000

Please advise ABC Ltd. on the costs that can be capitalized in accordance with AS
10 (Revised).

Solution
According to AS-10 (Revised), the cost of an item of property, plant & equipment
comprises its purchase price, all taxes (other than those refundable or eligible as
input tax credit) and any costs 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. The initial estimates of dismantling costs must be
capitalized at their present values. Initial operating losses do not form part of cost
of property, plant and equipment.

S.No. Particulars Capitalisation Amt (Rs.)

1 Cost of the plant (cost per supplier’s invoice Yes 25,00,000

plus taxes)
2 Initial delivery and handling costs Yes 2,00,000
3 Cost of site preparation Yes 6,00,000
4 Consultants used for advice on the Yes 7,00,000
acquisition of the plant
5 Present Value Estimated dismantling costs to Yes 3,00,000
be incurred after 7 years
Total Cost to be capitalized 43,00,000

Interest charges paid to suppliers will not be capitalized unless the asset is a
qualifying asset as defined by AS-16.

AS – 10 Q&A INDIGOLEARN PAGE 8

Illustration 15

A Ltd. has an item of plant with an initial cost of Rs.1,00,000. At the date of
revaluation, accumulated depreciation amounted to Rs.55,000. The fair value of the
asset, by reference to transactions in similar assets, is assessed to be Rs. 65,000.
Pass Journal Entries with regard to Revaluation.

Particulars Debit Credit

Amount Amount
Accumulated depreciation A/c Dr. 55,000
To Asset A/c 55,000
(Being elimination of accumulated depreciation against the cost
of the asset)

Asset A/c Dr. 20,000

To Revaluation Surplus A/c 20,000

(Being increase of net asset value to Fair value)

Illustration 16

B Ltd. owns an asset with an original cost of Rs. 2,00,000. On acquisition,

management determined that the useful life was 10 years and the residual value
would be Rs 20,000. The asset is now 8 years old, and during this time there have
been no revisions to the assessed residual value.

At the end of year 8, management has reviewed the useful life and residual value
and has determined that the useful life can be extended to 12 years in view of the
maintenance program adopted by the company. As a result, the residual value will
reduce to Rs.10,000.

How would the above changes in estimates be made by B Ltd ?

Solution

Depreciable amount = 2,00,000 – 20,000

= 1,80,000
Annual Depreciation Amount =(1,80,000/10)
=18,000

Total Deprecation Debited =18,000 x 8

=1,44,000

AS – 10 Q&A INDIGOLEARN PAGE 9

Carrying Amount of Asset at end of 8 Years =2,00,000 – 1,44,000
=56,000
Asset can be used for 4 more years.
Revised Depreciation =(56,000 -10,000) / 4
=11,500

Illustration 17

An entity bought a plot of land for development of office buildings. Development of

the land was scheduled into six phases. The land scheduled for development in
phases five and six was leased to another entity on a short-term basis as a parking
lot for heavy vehicles.
What is the treatment of rental income from car parking lot?

Solution

Some operations occur in connection with the construction or development of an

item of PPE, but are not necessary to bring the item to the location and condition
necessary for it to be capable of operating in the manner intended by management.

In the given case the land scheduled for development was leased on a short term
basis as a parking lot for heavy vehicles. The car park activity is incidental to the
entity`s principal activity of property development. The income and related
expenses of incidental operations are recognized in the Statement of Profit and Loss
for the period.

Illustration 18

An entity acquires the right to use an underground cave for gas storage purposes for
a period of 50 years. The cave is filled with gas, but a substantial part of that gas
will only be used to keep the cave under pressure in order to be able to get gas out
of the cave. It is not possible to distinguish the gas that will be used to keep the
cave under pressure and the rest of the gas. Evaluate whether AS 10 would apply or
AS 2.

Solution

The total volume of gas must be virtually split into

(i) Gas held for sale, and

(ii) Gas held to keep the cave under pressure.

The former must be accounted for under AS 2 as Inventories. The latter must be
accounted for as PPE under AS 10 and depreciated over the period the cave is
expected to be used.

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