1 Introduction to published accounts Chapter learning objectives

Chapter 2

^Test^y^our understanding 1

An entity started construction on a building for its own use on 1 April 20X7 and incurred the following costs: $000 Purchase price of land 250,000 Stamp duty 5,000 Legal fees 10,000 Site preparation and clearance 18,000 Materials 100,000 Labour (period 1 April 20X7 to 1 July 20X8) 150,000 Architect’s fees 20,000 General overheads 30,000 ––––––– 583,000 ––––––– The following information is also relevant:  Material costs were greater than anticipated. On investigation, it was found that materials costing $10 million had been spoiled and therefore wasted and a further $15 million was incurred on materials as a result of faulty design work.  As a result of these problems, work on the building ceased for a fortnight during October 20X7 and it is estimated that approximately $9 million of the labour costs relate to this period.  The building was completed on 1 July 20X8 and occupied on 1 September 20X8. You are required to calculate the cost of the building that will be included in tangible non-current asset additions.

Subsequent expenditure
Subsequent expenditure on property, plant and equipment should only be treated as part of the cost of the asset if:
 it enhances the economic benefits provided by the asset (this could
be extending the asset's life, an expansion or increasing the
productivity of the asset)
 it relates to an overhaul or required major inspection of the asset –
the costs associated with this should be capitalised and depreciated
over the time until the next overhaul or safety inspection
 it is replacing a component of a complex asset. The replaced
component will be derecognised. A complex asset is an asset made
up of a number of components, which each depreciate at different
rates, e.g. an aircraft would comprise body, engines and interior.

KAPLAN PUBLISHING 27