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Property, Plant and Equipment Para Assignment PDF

Added on - 17 Jun 2021

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Solution-2Part – (a)As per HKAS 16, Property, Plant and Equipment para 7, an item should be recognized as an asset when ithas become evident that the item has future economic benefits to the company and the cost of the itemcan be reliably measured. Only the items satisfying the above criteria are recognized as an asset. Futureeconomic benefits means the benefits in the form of cash inflow, or savings in cash outflows, or in anyother means which helps in production or reducing expenses ("Property, Plant and Equipment", 2018).Further, the para 15 requires to record the asset at its cost on initial recognition. However, formeasurement after recognition, the company may choose between cost model and revaluation model.The cost model states that the asset should be recorded at cost less accumulated depreciation whereasthe revaluation model states that the assets carrying value should be reviewed at each period end andthe assets should be carried at its recoverable amount. The recoverable amount is the fair value of theasset that will be realized in the market less any costs to sell.In the given case, the Pharma Ltd., started developing a new cancer drug. However, the local authorityhas approved the new cancer drug on 1 September 2016 only as the drug has proved to be commerciallysuccessful. Hence, the drug will become asset on 1 September, 2016 and will be recognized as an assetonce it comes into existence, i.e. on 31 March, 2018.So, the accounting treatment for the expenditures incurred are as follows:Costs incurred between 1 April, 2016 to 31 August, 2016– Will be treated as research and developmentcost and should be charged to P&L.Costs incurred between 1 September, 2016 to 31 March, 2017– Will be treated as an asset and shouldbe accumulated in CWIP, i.e. capital work in process.Costs incurred between 1 April, 2017 to 31 March, 2018– As on 31 March, 2018 (assuming the producthas been completed) should be transferred to the Asset account from CWIP account as it fulfills therecognition and measurement criteria of HKAS 16.Further, as on March 31, 2018 the asset should be valued at $115,000 and the difference of $ 10,000(125000-115000) should be treated as impairment loss on revaluation.Part – (b)Event -1– The correct classification of the building purchases would be to recognize it as an assetsunder property, plant and equipment since it satisfies the recognition criteria as mentioned in HKAS 16which stats that an item should be recognized as an asset is it has future economic benefits for theentity and its cost can be reliably measured.In the given case, the company purchased a building which will used for manufacturing of various drugs.Since, without the building the drugs can’t be manufactured or developed so it means that the buildinghas future economic benefits to the company in the form of revenue to be generated frommanufactured drugs. Further, the purchase price of building paid is its cost.Hence, we came at a conclusion that the building is an asset for the company.
The relevant journal entries for the year ended March 31, 2017 are as below:DateParticularsDebit ($)Credit ($)31-Jan-17Building45,000,000To Cash45,000,000(To record purchase of building)31-03-17Depreciation (45*10^6/15/12*2)500,000To Accumulated Depreciation500,000(To record depreciation on building)(i)As per HKAS 37, “Provisions, Contingent Liabilities and Contingent Assets”, a provision is a liability ofuncertain amount or timing. Means a liability which is sure to come but whose amount and time ofoccurrence is not available. The liability means a present obligation arise due to past events which isexpected to be settled in the form of outflow of some economic benefits. In simple words, liability is anobligation to pay certain amount for benefits taken or consumed, for example, amount payable forwages, electricity or utilities consumed, etc. The settlement of such obligation is required to be made inthe resources valuable to the company for example by payment of cash, or by exchange of some assets(“Provisions, Contingent Liabilities and Contingent Assets”, 2018).Hence, the provision is the liability for which benefits are expected to be taken, but the value and timingof such benefits is unknown.As per para 14 of HKAS 37, the provision should be made when it satisfies the following criteria’s.(a)An present obligation is there which has arisen due to some past events of the entity(b)It is probable that this obligation needs to be settled in the form of outflow of some resourceshaving future economic benefits to the company.(c)And an estimate can be made reliably for such expensesHence, if all the above conditions are satisfied then an item should be recognized as a provision in thebooks and if any of the conditions are not satisfied then the item should not be recognized as aprovision.(ii)Event -2Accounting issue– Whether to account for the cost to be paid for cleaning up of contamination causeddue to chemical pollution.Accounting Treatment– Since, this is not a legal obligation however, it is constructive obligation whichinvolves outflow of resources at a future date. Hence, the company should treat this expense as
provision and provision should be recognized in the books as it satisfies all the recognition criteria ofHKAS 37. Further, since the expense is going to be happen in future so the company should also discountthe amount of provision using a discount rate.Journal Entry- The Journal Entry for recognizing the provision is as below:Cleaning of Contamination expense Dr.$10,000,000To Provision for cleaning of contamination$10,000,000Event -3Accounting issue– Whether to account for the cost of claim to be paid for infringement of patent.Accounting Treatment– Since, the current scenario, does not satisfies the present obligation criteria andfurther the infringement of patent has occurred after the balance sheet, hence it is not a provision.Moreover, the provision should not be made for future losses.Instead, this cost of claim is a contingent liability. As per HKAS 37, a contingent liability means a possibleobligation arises due to past events but whose occurrence depends upon certain future events and alsonot probable that whether resources having future economic benefits needs to be paid and moreoveramount of obligation cannot be reliably measured.Journal Entry- There will be no journal entry as contingent liability is not recognized in books instead itis shown as a foot note to the financial statements.
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