FR – Nov 2020 – L2 – Q6 – Property, Plant, and Equipment (IAS 16)

Discuss depreciation concepts and characteristics under IAS 16 and calculate machine cost, revenue expenditures, and carrying amounts over the years.

Question

Noodles Nigeria Limited (NNL) manufactures various types of noodles in Oluyole for sale across Nigeria. Recently, to sustain the company’s market leadership, NNL bought a brand new machine under the following conditions:

On September 1, 2016, NNL decided to upgrade the machine by adding new major components at a cost of N300,000,000. As a result of the upgrade, the remaining useful life was increased to 8,000,000 units and the residual value was revised to N114,000,000.

Required:
a. Describe what is meant by depreciable amount within the context of IAS 16 on property, plant, and equipment (PPE). (1 Mark)
b. Highlight THREE characteristics of depreciable assets under IAS 16. (3 Marks)
c. Describe the TWO models of accounting for cost of PPE under IAS 16. (3 Marks)
d. Calculate the following:
i. Machine cost. (3 Marks)
ii. Revenue expenditure over the years in the statement of profit or loss. (5 Marks)
iii. Carrying amounts of the machine over the years. (5 Marks)

Answer

a. Depreciable Amount (1 Mark)
The depreciable amount is the cost of an asset, or other amount substituted for cost, less its residual value. It is the portion of the asset’s cost that will be allocated over its useful life through depreciation.

b. Characteristics of Depreciable Assets (3 Marks)
i. Tangible: The asset must be a physical object like machinery or equipment.
ii. Finite Useful Life: The asset has a limited useful life over which it will be depreciated.
iii. Used in Business Operations: The asset must be used for generating income, either in production or services.

c. Models of Accounting for PPE under IAS 16 (3 Marks)
i. Cost Model: The asset is carried at its cost less accumulated depreciation and impairment losses.
ii. Revaluation Model: The asset is revalued at its fair value, less accumulated depreciation and impairment losses subsequent to the revaluation.

(d)

(i) Computation of cost of the machine as at:
September 1, 2015.