On January 1, 2021 Simon Co. purchased an item of equipment for P600,000, including P50,000 refundable purchase taxes. The purchase price was funded by raising a loan of P605,000. In addition, the entity has to pay P5,000 in loan raising fees to the Bank. The loan is secured against the equipment. In January 2021 the entity incurred costs of P20,000 in transporting the equipment to the entity’s site and P100,000 in installing the equipment at the site. At the end of the equipment’s 10-year useful life the entity is required to dismantle the equipment and restore the building housing the equipment. The present value of the cost of dismantling the equipment and restoring the building is estimated to be P100,000. In January 2021 the entity’s engineer incurred the following costs in modifying the equipment so that it can produce the products manufactured by the entity: • Materials – P55,000 • Labour – P65,000 • Depreciation of plant and equipment used to perform the modifications – P15,000. In January 2021 the entity’s production staff were trained in how to operate the new item of equipment. Training costs included: • Cost of an expert external instructor – P7,000 • Labour – P3,000. In February 2021 the entity’s production team tested the equipment and the engineering team made further modifications necessary to get the equipment to function as intended by management. The following costs were incurred in the testing phase: • Materials – P21,000 • Labor – P16,000. The equipment was ready for use on March 1, 2021. However, because of low initial order levels the entity incurred a loss of P23,000 on operating the equipment during March. Thereafter the equipment operated profitably. Required: What is the correct initial cost of the Equipment? What is the depreciation expense in 2021 assuming straight-line method is used?
On January 1, 2021 Simon Co. purchased an item of equipment for P600,000, including P50,000 refundable purchase taxes. The purchase price was funded by raising a loan of P605,000. In addition, the entity has to pay P5,000 in loan raising fees to the Bank. The loan is secured against the equipment. In January 2021 the entity incurred costs of P20,000 in transporting the equipment to the entity’s site and P100,000 in installing the equipment at the site. At the end of the equipment’s 10-year useful life the entity is required to dismantle the equipment and restore the building housing the equipment. The present value of the cost of dismantling the equipment and restoring the building is estimated to be P100,000.
In January 2021 the entity’s engineer incurred the following costs in modifying the equipment so that it can produce the products manufactured by the entity: • Materials – P55,000 • Labour – P65,000 •
In January 2021 the entity’s production staff were trained in how to operate the new item of equipment. Training costs included: • Cost of an expert external instructor – P7,000 • Labour – P3,000. In February 2021 the entity’s production team tested the equipment and the engineering team made further modifications necessary to get the equipment to function as intended by management. The following costs were incurred in the testing phase: • Materials – P21,000 • Labor – P16,000.
The equipment was ready for use on March 1, 2021. However, because of low initial order levels the entity incurred a loss of P23,000 on operating the equipment during March. Thereafter the equipment operated profitably.
Required:
- What is the correct initial cost of the Equipment?
- What is the depreciation expense in 2021 assuming straight-line method is used?
Trending now
This is a popular solution!
Step by step
Solved in 3 steps
