11-04-2009, 05:21 PM
example
This case study is concerned with subsequent costs.
Facts
Road Truckers Inc. has acquired a heavy road transporter at a cost of $100,000 (with no breakdown of the component parts). The estimated useful life is 10 years. At the end of the sixth year, the power train requires replacement, as further maintenance is uneconomical due to the off-road time required. The remainder
of the vehicle is perfectly roadworthy and is expected to last for the next four years. The cost of a new power train is $45,000.
Required
Can the cost of the new power train be recognized as an asset, and, if so, what treatment should be used?
Solution
The new power train will produce economic benefits to Road Truckers Inc., and the cost is measurable. Hence the item should be recognized as an asset. The original invoice for the transporter did not specify the cost of the power train; however, the cost of the replacementâ$45,000âcan be used as an indication (usually by discounting) of the likely cost, six years previously. If an appropriate discount rate is 5%
per annum, $45,000 discounted back six years amounts to $33,500 [$45,000 / (1.05)]6, which would be written out of the asset records. The cost of the new power train, $45,000, would be added to the asset record, resulting in a new asset cost of $111,500 ($100,000 â $33,500 + $45,000).
source IFRS Practical Implementation Guide and Workbook Second Edition Abbas Ali Mirza Magnus Orrell Graham J. Holt
This case study is concerned with subsequent costs.
Facts
Road Truckers Inc. has acquired a heavy road transporter at a cost of $100,000 (with no breakdown of the component parts). The estimated useful life is 10 years. At the end of the sixth year, the power train requires replacement, as further maintenance is uneconomical due to the off-road time required. The remainder
of the vehicle is perfectly roadworthy and is expected to last for the next four years. The cost of a new power train is $45,000.
Required
Can the cost of the new power train be recognized as an asset, and, if so, what treatment should be used?
Solution
The new power train will produce economic benefits to Road Truckers Inc., and the cost is measurable. Hence the item should be recognized as an asset. The original invoice for the transporter did not specify the cost of the power train; however, the cost of the replacementâ$45,000âcan be used as an indication (usually by discounting) of the likely cost, six years previously. If an appropriate discount rate is 5%
per annum, $45,000 discounted back six years amounts to $33,500 [$45,000 / (1.05)]6, which would be written out of the asset records. The cost of the new power train, $45,000, would be added to the asset record, resulting in a new asset cost of $111,500 ($100,000 â $33,500 + $45,000).
source IFRS Practical Implementation Guide and Workbook Second Edition Abbas Ali Mirza Magnus Orrell Graham J. Holt
