Hardy Ltd. intends to extend the factory set up on the adjacent plot with disintegrated old premises. It acquired the land having an area of 250…

CA Intermediate · Advanced Accounting · PYQS · May 2025
Hardy Ltd. intends to extend the factory set up on the adjacent plot with disintegrated old premises. It acquired the land having an area of 250 hectares at a cost of 25,000 per hectare. Hardy Ltd. incurred Stamp duty and registration charges of 5% of land value. Legal fees were paid - 4,75,000 for land acquisition. Hardy Ltd. incurred - 37,85,000 for demolishing old premises thereon. A sum of 12,60,000 (including 5% GST thereon) was realized from the sale of material salvaged from the site. Till the new site with extended factory premises is ready, the company needs to move the present production facilities to another (temporary) site. The following incremental costs will be incurred. (1) Set up costs of 7,50,000 to install machinery in the new location. (2) Rent of 12,00,000. (3) Removal costs of 2,50,000 to transport the machinery from the old location to the temporary location. (i) Management is of the opinion that the cost of moving the production facilities to another temporary location can be capitalised. You are required to advise. (ii) You are also required to compute the cost of land acquired.

Suggested Answer and Working Notes:

(i) Constructing or acquiring a new asset may result in incremental costs that would have been avoided if the asset had not been constructed or acquired.These costs are not to be included in the cost of the asset if they are not 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.The costs to be incurred by the company are in the nature of costs of relocating or reorganising operations of the company and do not meet the requirement of AS 10 (Revised)Therefore, these costs cannot be capitalized. (ii) Computation of cost of land Particulars ₹ Purchase Price 250 hectares X 25,000 per hectares 62,50,000 Stamp Duty and Registration Charges 5% of 62,50,000 3,12,500 Legal and Consultancy Fees 4,75,000 Demolition Expenses (Net of Salvage (100/105) Income) 37,85,000 X (12,00,000) 25,85,000 Cost of Land 96,22,500

Topics: AS 10

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