On 1 st April, 2024, Y Limited purchased an industrial plot of land for 50,00,000 for the purpose of constructing a new factory. This cost of…
CA Intermediate · Advanced Accounting · RTP · May 2026
On 1 st April, 2024, Y Limited purchased an industrial plot of land for 50,00,000 for the purpose of constructing a new factory. This cost of 50,00,000 included legal cost of 2,50,000 incurred for the purpose of acquisition of this plot. The construction of the factory commenced on 1 st May, 2024. Y Limited provides you with the following details of the costs incurred in relation to the above construction: Particulars Amount (₹) Preparation and levelling of the land 1,60,000 Employment costs of construction workers (per month) 58,000 Purchase of Raw materials for the construction 42,48,000 Cost of relocating the workers to new factory for work 75,000 Costs of inaugural function of the new factory on 1 st January, 2025 95,000 Overhead costs incurred directly on the construction of the factory (per month) 50,000 The construction of the factory was completed on 31 st December, 2024 and production could commence on 1 st February, 2025. The overall useful life of the factory building was estimated at 40 years from the date of completion. However, it was estimated that the roof would need to be replaced 20 years after the date of completion. The cost of replacing the roof at current prices would be 25% of the total cost of the building. The construction of the factory was partly financed by a loan of 56,00,000 raised from State Bank of India on 1 st April, 2024 at an interest rate of 9% per annum. During the period when the loan proceeds had been fully utilized to finance the construction, Y Limited earned an income of 50,000 from the temporary investment of the proceeds. Assume that all of the net finance cost needs to be allocated to the cost of factory (excluding land) and interest cost to be capitalized based on eight months' period. You are required to compute the carrying amount (i.e. value after charging depreciation) of the Factory in the books of Y Limited as at 31 st March, 2025 as per the provisions of the relevant Accounting Standard.
Suggested Answer and Working Notes:
Cost of construction of the factory Particulars Amount (₹) Cost of Industrial Plot 50,00,000 Preparation and levelling of the land 1,60,000 Employment costs of construction workers (₹ 58,000 per month) for 8 months 4,64,000 Purchase of Raw materials for the construction 42,48,000 Overhead costs incurred directly on the construction of the factory (50,000 per month) for 8 months 4,00,000 Interest on 56,00,000 for 9 months @ 9% = 3,78,000 less - 50,000 3,28,000 Total Cost (A) 1,06,00,000 Depreciation (B) (W.N.) 43,750 Carrying amount of the factory (A-B) 1,05,56,250 Working Note: (1) Calculation of Depreciation (a) On land of 50,00,000 (b) On remaining cost of Building i.e.1,06,00,000 - 50,00,000 = 56,00,000 (a) Building - 56,00,000 x 75% /40 yrs x 3/12 = 26,250 (b) On roof 56,00,000 x 25% / 20 yrs x 3/12 = 17,500 Total Depreciation charged = 43,750 (2) Cost of relocating the workers to new factory for work and cost of inaugural function of the new factory is not directly attributable to construction cost, hence not considered.
Topics: AS 7
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