Reference no: EM133102680
Question - Jade Limited manufactures car parts. Because the demand for Jade Limited's parts has exceeded production, Jade decided in late 2018 to purchase a new manufacturing plant that could produce three times as many parts for the same overall cost. The following costs associated with the purchase and installation of the item of plant were incurred during February 2019:
Purchase Price $900,000
Goods and Services Tax (refundable) 20,000
Transportation and delivery costs 13,000
Advertising and promotional activities associated with the new product line 13,000
Installation and assembly costs 11,000
Modifications to the item of plant to get it ready for use 19,000
Fees paid to consulting engineers 5,000
Insurance while the item of plant is in transit 1,000
Customs duties (non-refundable) 17,000
Cost of training employees to use the item of plant 10,000
Testing to ensure that the item of plant was functioning properly 4,000
Administration costs associated with the introduction of the new product line 12,000
Notes:
-The physical life of the item of plant is estimated to be 20 years. However, Jade Limited expects that, due to future technological changes the plant will be used for just 12 years, at which time Jade Limited will dismantle the plant and dispose of the asset.
-A small number of samples were produced during the testing of the item of plant. The sample products cost $785 to manufacture and were sold for $1,750.
-The costs of dismantling the plant after 12 years are estimated to be $20,000. To account for future dismantling costs, Jade Limited believe a discount rate of 5% best reflects the current market assessments of the time value of money and the risks specific to the liability.
-The modifications, which involved the installation of safety guards, were necessary for the plant to comply with Occupational Safety and Health (OSH) Regulations. The cost of the modifications comprised $19,000 in materials and $5,000 in wages.
-It is also a legal requirement that the item of plant be inspected and certified by WorkCover every four years. The first inspection was carried out on 18 February 2019 and a Certificate of Compliance (valid for 4 years from the date of issue) was issued by WorkCover on 20 February 2019. The cost of the inspection and certification was $4,000. The next inspection is scheduled for December 2021.
-On 1 March 2019, the item of plant was ready for use as intended by management of Jade Limited and production commenced.
-According to Jade Limited's long-term plan, the item of plant is expected to be used to manufacture 39,000 units over the next 12 years. Although 4,900 units are expected to be manufactured during the first year, the rate of production is expected to decline by 300 units per year (i.e., 4,600 for year two and 4,300 for year three) to 1,600 units in year twelve.
Required -
1. In accordance with AASB 116 Property, Plant and Equipment, what is the cost of the item of machinery on initial recognition?
2. Calculate the depreciation expense for each of the 12 years using: the straight-line method of depreciation; and the units of production method.
3. Explain which is the most appropriate depreciation method for: the plant; and the inspection and certificate costs?
4. On what date should depreciation of the plant commence?