MS Ltd. has acquired a heavy machinery at a cost of 1,00,00,000 (with no breakdown of the component parts). The estimated useful life is 10 years.…

CA Intermediate · Advanced Accounting · RTP · January 2025
MS Ltd. has acquired a heavy machinery at a cost of 1,00,00,000 (with no breakdown of the component parts). The estimated useful life is 10 years. At the end of the sixth year, one of the major components, the turbine requires replacement, as further maintenance is uneconomical. The remainder of the machine is perfect and is expected to last for the next four years. The cost of a new turbine is 45,00,000. The discount rate assumed is 5%. Can the cost of the new turbine be recognised as an asset, and, if so, what treatment should be used?

Suggested Answer and Working Notes:

The new turbine will produce economic benefits to MS Ltd., and the cost is measurable. Hence, the item should be recognised as an asset. The original invoice for the machine did not specify the cost of the turbine; however, the cost of the replacement - 45,00,000 can be used as an indication (usually by discounting) of the likely cost, six years previously. Statement showing cost of new turbine and machine after 6th year Particulars ₹ Cost of machines recognized on purchase 1,00,00,000 Less: Depreciation charged for 6 years [(1,00,00,000/10) x 6] (60,00,000) 40,00,000 Less: Current cost of turbine to be derecognized: Cost of Turbine before 6 years [45,00,000 x {1 / (1.05)}] 33,57,900 Less: Depreciation for 6 years [(33,57,900 / 10) x 6] (20,14,740) (13,43,160) Add: Cost of new turbine to be recognised 45,00,000 Revised carrying amount of machine 71,56,840

Topics: AS 10

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