Information in relation to financial assets

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PART 1

a) Capitalize- labour and travel costs for managers to inspect possible new machines arise directly from the acquisition of the new machine. Therefore, they are directly attributable costs which should be included in the cost of the building.

b) Capitalize- freight and insurance to get the new machine to the factory are delivery and handling costs which are necessary to bring the machine to the factory therefore they should be capitalized.

c) Capitalize- costs for renovating the factory are the costs of site preparation which are directly attributable costs therefore they should be capitalized.

d) Expensed- the cost of cooling equipment should be expensed because it does not arise directly from the acquisition of the machine.

e) Expensed- cost of repairing is an overhead cost therefore it should be expensed and not capitalized to the cost of the building.

f) Expensed- training costs of workers should be expensed because it is not directly attributable to the acquisition and installation of the machine.

PART 2

Maryborough Ltd should capitalize the cost $10000 that was incurred in acquisition process for legal fees, real estate agent's fees and stamp duties. This is because paragraph 7 of International Accounting Standard 16 Property, Plant and Equipment states that "An item of property, plant and equipment that qualifies for recognition as an asset shall be measured at its cost." Paragraph 16 of International Accounting Standard 16 Property, Plant and Equipment also states that "The cost of an item of property, plant and equipment comprises:

(a)

its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates.

(b)

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.

(c)

the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, the obligation for which an entity incurs either when the item is acquired or as a consequence of having used the item during a particular period for purposes other than to produce inventories during that period."

Since legal fees, real estate agent's fees and stamp duties are directly attributable to bringing the asset to the location and condition necessary, they should be capitalized in the cost of the building. The building should be recorded at the initial cost of $510000.

Nevertheless, paragraph 31 of International Accounting Standard 16 Property, Plant and Equipment states that " After recognition as an asset, an item of property, plant and equipment whose fair value can be measured reliably shall be carried at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses. Revaluations shall be made with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the end of the reporting period."

However, after the initial recognition of the building at cost, management can adopt the revaluation model and revalue it to its fair value of $500000.

c) Paragraph 57 of International Accounting Standard 16 Property, Plant and Equipment states "the useful life of an asset is defined in terms of the asset's expected utility to the entity. The asset management policy of the entity may involve the disposal of assets after a specified time or after consumption of a specified proportion of the future economic benefits embodied in the asset. Therefore, the useful life of an asset may be shorter than its economic life[G]. The estimation of the useful life of the asset is a matter of judgement based on the experience of the entity with similar assets."

Thus, it can be concluded that the useful life of an asset is the period over which an asset is estimated to be available for use by an entity

In addition, paragraph 56 of International Accounting Standard 16 Property, Plant and Equipment states that "the future economic benefits embodied in an asset are consumed by an entity principally through its use. However, other factors, such as technical or commercial obsolescence and wear and tear while an asset remains idle, often result in the diminution of the economic benefits that might have been obtained from the asset. Consequently, all the following factors are considered in determining the useful life of an asset:

(a)

expected usage of the asset. Usage is assessed by reference to the asset's expected capacity or physical output.

(b)

expected physical wear and tear, which depends on operational factors such as the number of shifts for which the asset is to be used and the repair and maintenance programme, and the care and maintenance of the asset while idle.

(c)

technical or commercial obsolescence arising from changes or improvements in production, or from a change in the market demand for the product or service output of the asset.

(d)

legal or similar limits on the use of the asset, such as the expiry dates of related leases."

Therefore it can be concluded that the expected usage of the asset, expected physical wear and tear, technical or commercial obsolescence and legal limits on the use of the asset determine its useful life.

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