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Compute the initial cost of the machine to be reported

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Question - Molly Company purchased a new machine from a supplier in America for its ice cream business. The cost of the machine, including custom duties, handling and shipment is P500,000. The machine is covered with a 3-months warranty. Upon arrival, the machine was mounted and trial and testing followed. A series of test production were made to test efficiency, production volume and establish the desired product quality. The company incurred the following during testing:

Test 1 - materials, P8,000; labor, P2,000; overhead, P3,000. Test product did not meet desired quality for sale.

Test 2 - materials, P8,500; labor, P2,000; overhead, P3,000. Test product did not meet desired quality for sale, but sold to employees for P10,000.

Test 3 - materials, P8,500; labor, P2,000; overhead, P3,000. Test product reached desired quality for sale, sold to employees and outsiders for P15,000.

Test 4 - materials, P8,500; labor, P2,000; overhead, P3,000. Test for efficiency. Sold products for P16,000.

Required - Compute the initial cost of the machine to be reported by Molly Company, applying the amendments to IAS 16, and support your answer with an explanation of why you arrive with that answer.

Reference no: EM133189411

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