On 1 October 20X5 Dearing Co acquired a machine under the following terms. $ Cost 1,050,000 Trade discount (applying to cost only) 20% Early Settlement discount taken(on the payable amount 5% of the based cost only) Freight charges 30,000 Electrical installation cost 28,000 Staff training in use of machine 40,000 Pre-production testing 22,000 Purchase of a three-year maintenance contract 60,000 On 1 October 20X7 Dearing Co decided to upgrade the machine by adding new components at a cost of $200,000. This upgrade led to a reduction in the production time per unit of the goods being manufacturedusing the machine. (a) Explain how the non-current asset should be treated including amount to be recognised accordingly. *For part a, can you tell whether 5% discount should be taken or not and why? (b)Give 5 reasons, how should the Rs200,000 worth of new components be accounted for in accordance with IAS 16. (c) By 27 September 20x7 internal evidence had emerged suggesting that Dearing Co's machine was impaired. What could be the internal evidence for the impairment of the machine.

Cornerstones of Financial Accounting

4th Edition

ISBN:9781337690881

Author:Jay Rich, Jeff Jones

Publisher:Jay Rich, Jeff Jones

Chapter7: Operating Assets

Section: Chapter Questions

Problem 43E

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On 1 October 20X5 Dearing Co acquired a machine under the following terms.

Cost 1,050,000

Trade discount (applying to cost only) 20%

Early Settlement discount taken(on the payable amount 5%

of the based cost only)

Freight charges 30,000

Electrical installation cost 28,000

Staff training in use of machine 40,000

Pre-production testing 22,000

Purchase of a three-year maintenance contract 60,000

On 1 October 20X7 Dearing Co decided to upgrade the machine by adding new components at a cost of $200,000. This upgrade led to a reduction in the production time per unit of the goods being manufacturedusing the machine.

(a) Explain how the non-current asset should be treated including amount to be recognised accordingly.

*For part a, can you tell whether 5% discount should be taken or not and why?

(b)Give 5 reasons, how should the Rs200,000 worth of new components be accounted for in accordance with IAS 16.

(c) By 27 September 20x7 internal evidence had emerged suggesting that Dearing Co's machine was impaired. What could be the internal evidence for the impairment of the machine.

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