On 1 April, 2022, Sky Limited purchased a machinery for 7,35,000 (inclusive of GST @ 5%). Input credit is available for entire amount of GST paid.…

CA Intermediate · Advanced Accounting · PYQS · May 2026
On 1 April, 2022, Sky Limited purchased a machinery for 7,35,000 (inclusive of GST @ 5%). Input credit is available for entire amount of GST paid. The company incurred the following other expenses for installation: Particulars ₹ Cost of preparation of site for installation 16,500 Total Labour charges 75,000 (200 out of the total 500 men hours worked, were spent on installation of the machinery) Total salary of supervisor 34,000 (Time spent for installation was 25% of the total time worked) Interest charges paid to supplier of machinery for deferred credit 8,000 Test run and experimental production expenses 28,200 Consultancy charges to architect for plant set up 18,800 Depreciation on assets used for installation 8,000 The machine was ready for use on October 1, 2022 but was put to use from February 1, 2023. Due to this delay further expenses of 10,800 were incurred. The estimated useful life of machine is 10 years. The machine is depreciated on straight line basis and does not carry any residual value. On September 30, 2025, the company has revalued the machine at 7 lakhs and the surplus arising out of the revaluation being credited to revaluation reserve. For the year ended March 31, 2026, conditions indicating an impairment of the machine existed and the amount recoverable ascertained to be only 3 Lakhs. You are required to: (i) Calculate the value at which the machine should be capitalized and the amount of depreciation to be charged for the year ending March 31, 2023 in the books of Sky Limited. (ii) Calculate the loss on impairment of the machine and show how this loss is to be treated in the books of Sky Limited. The company had followed the policy of writing down the revaluation surplus by the increased charge of depreciation resulting from the revaluation.

Suggested Answer and Working Notes:

(i) Calculation of Cost of Machinery Particulars ₹ Purchase Price Given 7,35,000 Add: Site Preparation Cost Given 16,500 Labour charges (75,000 × 200/500) Given 30,000 Supervisor's Salary 25% of 34,000 8,500 Test run and experimental production charges Given 28,200 Architect Fees for set up Given 18,800 Depreciation on assets used for installation Given 8,000 Total Cost of Asset 8,45,000 Less: GST credit receivable (35,000) Value to be capitalized 8,10,000 Depreciation to be charged on 31.3.2023 (for 6 month) SLM 10 year 40,500 Note: (i) Further Expenses of 10,800 from 1.10.2022 to 1.2.2023 to be charged to profit and loss A/c as plant was ready for production on 1.10.2022 (ii) Interest charges paid on "Deferred credit terms" to the supplier of the plant (not a qualifying asset) of 8,000 is not regarded as directly attributable costs and thus cannot be capitalized. It should be written off to the Statement of Profit and Loss in the period they are incurred. (ii) Statement showing impairment loss & Its Treatment Amount (₹) Amount (₹) Carrying amount of the machine as on 01/10/2022 8,10,000 Less: Depreciation for 3 years (8,10,000 x 3/10) (2,43,000) Carrying amount as on September 30/09/2025 5,67,000 Add: Upward revaluation (credited to revaluation reserve) 1,33,000 Carrying amount of the machine as on 30/09/2025 7,00,000 Less: Depreciation for 6 months up to 31/03/2026 (7,00,000 x 0.5/7) (50,000) Carrying amount as on March 31/03/2026 6,50,000 Less: Recoverable amount (3,00,000) Impairment Loss 3,50,000 Less: balance in revaluation reserve as on March 31/03/2026 [1,33,000 - (50,000 - 40,500)]* (1,23,500) Impairment Loss to be debited to Profit & Loss Account 2,26,500 * Depreciation for 01/10/2025 to 31/03/2026 (7,00,000 x 0.5/7) = 50,000 Depreciation to be set off against Revaluation Reserve = (1,33,000 x 0.5/7) = 9,500 (Impairment loss set off against revaluation reserve balance as per para 58 of AS 28 "impairment of assets")

Topics: AS 10

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