AS - 10

REVISION TEST PAPERS ( RTP )

MAY 18

Q. In the year 2016-17, an entity has acquired a new freehold building with a
useful life of 50 years for ` 90,00,000. The entity desires to calculate the
depreciation charge per annum using a straight-line method. It has identified the
following components (with no residual value of lifts & fixtures at the end of their
useful life) as follows:

Compone Useful life Cost

nt (Years)
Land Infinite ` 20,00,000
Roof 25 ` 10,00,000
Lifts 20 ` 5,00,000
Fixtures 10 ` 5,00,000
Remainder of building 50 ` 50,00,000
` 90,00,000
You are required to calculate depreciation for the year 2016-17 as per
componentization metho

A. Statement showing amount of depreciation as per

Componentization Method

Component Depreciation (Per

annum)
(`)
Land Nil
Roof 40,000
Lifts 25,000
Fixtures 50,000
Remainder of Building 1,00,000
2,15,000
Note: When the roof requires replacement at the end of its useful life the
carrying amount will be nil. The cost of replacing the roof should be recognized as a
new component.
NOV 18
Q. ABC Ltd. is installing a new plant at its production facility. It provides you the
following Information:

`
Cost of the plant (cost as per supplier's invoice) 31,25,000
Estimated dismantling costs to be incurred after 5 2,50,000
years
Initial Operating losses before commercial production 3,75,000
Initial delivery and handling costs 1,85,000
Cost of site preparation 4,50,000
Consultants used for advice on the acquisition of the 6,50,000
plant

You are required to compute the costs that can be capitalised for plant by
ABC Ltd., in accordance with AS 10: Property, Plant and Equipment.

A. According to AS 10 on Property, Plant and Equipment, the costs which will be

capitalized by ABC Ltd.:

`
Cost of the plant 31,25,000
Initial delivery and handling costs 1,85,000
Cost of site preparation 4,50,000
Consultants’ fees 6,50,000
Estimated dismantling costs to be incurred after 5 2,50,000
years
Total cost of Plant 46,60,000
Note: Operating losses before commercial production amounting to ` 3,75,000
will not be capitalized as per AS 10. They should be written off to the Statement of
Profit and Loss in the period they are incurred.
MAY 19
Q. Preet Ltd. is installing a new plant at its production facility. It has incurred
these costs:

1 Cost of the plant (cost per supplier’s invoice ` 50,00,000

. plus taxes)
2 Initial delivery and handling costs ` 4,00,000
.
 3 Cost of site preparation ` 12,00,000
.
4 Consultants used for advice on the acquisition ` 14,00,000
. of the plant
5 Interest charges paid to supplier of plant for ` 4,00,000
. deferred credit
6 Estimated dismantling costs to be incurred after ` 6,00,000
. 7 years
7 Operating losses before commercial production ` 8,00,000
.
Please advise Preet Ltd. on the costs that can be capitalised in accordance
with AS 10 (Revised).

A. According to AS 10 (Revised), these costs can be capitalised:

1. Cost of the plant ` 50,00,000

2. Initial delivery and handling costs ` 4,00,000
3. Cost of site preparation ` 12,00,000

4. Consultants’ fees `14,00,000

5. Estimated dismantling costs to be incurred after ` 6,00,000
7 years
` 86,00,000
Note: Interest charges paid on “Deferred credit terms” to the supplier of the
plant (not a qualifying asset) of ` 4,00,000 and operating losses before commercial
production amounting to ` 8,00,000 are not regarded as directly attributable costs
and thus cannot be capitalised. They should be written off to the Statement of Profit
and Loss in the period they are incurred.

NOV 19

Q. Shrishti Ltd. contracted with a supplier to purchase machinery which is to be

installed in its Department A in three months' time. Special foundations were required
for the machinery which were to be prepared within this supply lead time. The cost of
the site preparation and laying foundations were ` 1,41,870. These activities were
supervised by a technician during the entire period, who is employed for this purpose of
` 45,000 per month. The technician's services were given by Department B to
Department A, which billed the services at ` 49,500 per month after adding 10% profit
margin.
The machine was purchased at ` 1,58,34,000 inclusive of IGST @ 12% for
which input credit is available to Shrishti Ltd. ` 55,770 transportation charges were
incurred to bring the machine to the factory site. An Architect was appointed at a fee of
` 30,000 to supervise machinery installation at the factory site.
Ascertain the amount at which the Machinery should be capitalized under AS
10 considering that IGST credit is availed by the Shristhi Limited. Internally booked
profits should be eliminated in arriving at the cost of machine.

A. Calculation of Cost of Fixed Asset (i.e. Machinery)

Particulars `
Purchase Price Given (` 158,34,000 x 1,41,37,50
100/112) 0
Add: Site Preparation Given 1,41,870
Cost
Technician’s Specific/Attributable 1,35,000
Salary overheads for 3 months
(See Note) (45,000 x3)
Initial Delivery Transportation 55,770
Cost
Professional Fees Architect’s Fees 30,000
for Installation
Total Cost of Asset 1,45,00,14
0

MAY 20
Q. (a) Entity A has a policy of not providing for depreciation on PPE
capitalized in the year until the following year, but provides for a full
year's depreciation in the year of disposal of an asset. Is this acceptable?
(b) Entity A purchased an asset on 1st January 2016 for ` 1,00,000
and the asset had an estimated useful life of 10 years and a residual value
of nil. On 1st January 2020, the directors review the estimated life and
decide that the asset will probably be useful for a further 4 years. Calculate
the amount of depreciation for each year, if company charges depreciation
on Straight Line basis.
(c) The following items are given to you:
ITEMS
1. Costs of testing whether the asset is functioning properly, after deducting the
net proceeds from selling any items produced while bringing the asset to that
location and condition (such as samples produced when testing equipment);
2. Costs of conducting business in a new location or with a new class of
customer (including costs of staff training);
3. Any costs 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
4. Costs of opening a new facility or business, such as, inauguration costs;
5. Purchase price, including import duties and non–refundable purchase taxes,
after deducting trade discounts and rebates.
With reference to AS 10 “Property, Plant and Equipment”, classify the above items
under the following heads:
HEADS
i. Purchase Price of PPE
ii. Directly attributable cost of PPE or
iii. Cost not included in determining the carrying amount of an item of PPE.

A. (a) The depreciable amount of a tangible fixed asset should be

allocated on a systematic basis over its useful life. The depreciation method
should reflect the pattern in which the asset's future economic benefits are
expected to be consumed by the entity. Useful life means the period over
which the asset is expected to be available for use by the entity.
Depreciation should commence as soon as the asset is acquired and is
available for use. Thus, the policy of Entity A is not acceptable.
(b) The entity has charged depreciation using the straight-line
method at ` 10,000 per annum i.e (1,00,000/10 years). On 1st January
2020, the asset's net book value is [1,00,000 – (10,000 x 4)] = ` 60,000.
The remaining useful life is 4 years. The company should amend the
annual provision for depreciation to charge the unamortized cost over
the revised remaining life of four years. Consequently, it should charge
depreciation for the next 4 years at ` 15,000 per annum i.e. (60,000 / 4
years). Depreciation is recognized even if the Fair value of the Asset
exceeds its Carrying Amount. Repair and maintenance of an asset do not
negate the need to depreciate it.
 1. Costs of testing whether the asset is functioning properly, after deducting
the net proceeds from selling any items produced while bringing the asset to
that location and condition (such as samples produced when testing
equipment) will be classified as “Directly attributable cost of PPE”.
2. Costs of conducting business in a new location or with a new class of
customer (including costs of staff training) will be classified under head (iii)as it
will not be included in determining the carrying amount of an item of PPE.
3. Any costs 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 will be included in determination of Purchase Price of PPE
4. Costs of opening a new facility or business, such as, inauguration costs will be
classified under head (iii) as it will not be included in determining the carrying
amount of an item of PPE.
5. Purchase price, including import duties and non–refundable purchase taxes,
after deducting trade discounts and rebates will be included in determination
of purchase price of PPE.
NOV 20

Q. Omega Ltd. contracted with a supplier to purchase machinery

which is to be installed in its one department in three months' time.
Special foundations were required for the machinery which were to be
prepared within this supply lead time. The cost of the site preparation
and laying foundations were ` 1,40,000. These activities were supervised
by a technician during the entire period, who is employed for this purpose
of ` 45,000 per month.

The machine was purchased at ` 1,58,00,000 and ` 50,000

transportation charges were incurred to bring the machine to the factory
site. An Architect was appointed at a fee of 30,000 to supervise machinery
installation at the factory site. You are required to ascertain the amount at
which the Machinery should be capitalized under AS 10.

A. Calculation of Cost of Fixed Asset (i.e. Machinery)

Particulars `
 Purchase Price Given 1,58,00,00
0
Add Site Preparation Given 1,40,000
: Cost
Technician’s Salary Specific/Attributable 1,35,000
overheads for 3 months
(45,000 x3)
Initial Delivery Cost Transportation 50,000
Professional Fees Architect’s Fees 30,000
for Installation
Total Cost of Asset 1,61,55,00
0

PAST EXAM QUESTIONS

NOV 18

Q. Neon Enterprise operates a major chain of restaurants located in

different cities. The company has acquired a new restaurant located at
Chandigarh. The new-restaurant requires significant renovation
expenditure. Management expects that the renovations will last for 3
months during which the restaurant will be closed.
Management has prepared the following budget for this period –
Salaries of the staff engaged in preparation of restaurant before its opening `
7,50,000 Construction and remodelling cost of restaurant 30,00,000
Explain the treatment of these expenditures as per the provisions of AS 10
"Property, Plant and Equipment"
A. As per provisions of AS 10, any cost directly attributable to bring
the assets to the location and conditions necessary for it to be capable of
operating in the manner indicated by the management are called directly
attributable costs and would be included in the costs of an item of PPE.

Management of Neon Enterprise should capitalize the costs of

construction and remodelling the restaurant, because they are necessary to
bring the restaurant to the condition necessary for it to be capable of
operating in the manner intended by management. The restaurant cannot
be opened without incurring the construction and remodelling expenditure
amounting ` 30,00,000 and thus the expenditure should be considered part
of the asset.
However, the cost of salaries of staff engaged in preparation of
restaurant ` 7,50,000 before its opening are in the nature of operating
expenditure that would be incurred if the restaurant was open and these
costs are not necessary to bring the restaurant to the conditions necessary
for it to be capable of operating in the manner intended by management.
Hence, ` 7,50,000 should be expensed.