Reference no: EM132671346
Accounting treatment for PPE
Twister Ltd recently acquired a second-hand machine for installation in its factory. The machine was acquired from Robert Ltd, with Twister Ltd giving a block of land plus $5 000 cash in exchange for the machine. The land had been acquired by Twister Ltd for $200 000 three years ago, but was considered to have a fair value of $300 000 at the date of exchange. The machine had a carrying amount in the records of Robert Ltd of $310 000 at this date.
Twister Ltd planned to use the machine in its main factory. The installation of the machine would require that it be cemented into the factory floor in order to achieve sufficient stability for the machine to operate. The cost is expected to be $550. However, when the machine is replaced in three years' time, the costs of removal of the machine are expected to be $250. As the operation of the machine requires some technical knowledge, current staff will need to be trained for its use. As it has supplied the machine, Robert Ltd has agreed to supply training at a cost of $250.
Required:
The accountant of Twister Ltd is unsure of how to account for the acquisition of the machine and has asked for your advice. Prepare a report providing detailed advice to the accountant.
The report should include the following:
1. What are the recognition criteria for property, plant and equipment?
2. How should items of property, plant and equipment be measured at point of initial recognition.
3. How is cost determined in accordance with AASB116?
4. Estimate the cost of the Machine as per para 16 of AASB116.