Chapter 27 Machinery
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Kendall JennerChapter 27 Machinery
Uploaded by
Kendall JennerChapter 27
Machinery
Machinery
• When purchased, cost includes the following:
Purchase price
Freight, handling, storage and other cost related to the acquisition
Insurance while in transit
Installation cost, including site preparation and assembling
Cost of testing and trial run, and other cost necessary in preparing the
machinery for its intended use
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Machinery
• When purchased, cost includes the following:
Initial estimate of cost of dismantling and removing the machinery and
restoring the site for which the entity has a present obligation as
required by law or contract.
Fee paid to consultants for advice on the acquisition of the machinery.
Cost of safety rail and platform surrounding machine.
Cost of water device to keep machine cool.
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Tools & Patterns and Dies
• Tools
-classified as machine tools (i.e. drills and punches) and hand tools (i.e. hammer and
saws)
-should be segregated from the machinery account.
• Patterns and Dies
-used in designing or forging out a particular product.
-if used for the regular product, recorded as assets and are depreciated over the useful life
-if used for specially ordered product, form part of the cost of the special product
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Equipment
• Includes delivery equipment, store equipment, office equipment and
furniture and fixtures.
• Cost includes the purchase price, freight and other handling charges,
insurance while in transit, installation costs and other costs necessary in
preparing them for the intended use.
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Returnable Containers
• Containers in big units or of great bulk as in the case of tanks, drums and
barrels are classified as property, plant and equipment.
• Containers that are small and individually involve small amount as in the
case of bottles and boxes are classified as other noncurrent assets.
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Capital Expenditure and Revenue Expenditure
• An expenditure that benefits only the current period is a revenue
expenditure and therefore reported as an expense.
• An expenditure that benefits the current period and future periods is a
capital expenditure and therefore reported as an asset.
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Recognition of Subsequent Cost
• Subject to the same recognition criteria for the initial cost of property,
plant and equipment.
• If subsequent cost will increase the future service potential of the asset,
the cost should be capitalized.
• If subsequent cost merely maintains the existing level of standard
performance, the cost should be expensed when incurred.
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Future Economic Benefit
• Subsequent cost will benefit future periods or increase the future service
potential of asset when:
The expenditure extends the life of the property.
The expenditure increases the capacity of the property and quality of
output.
The expenditure improves the efficiency and safety of the property.
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Subsequent Cost
• The following expenditures are incurred during ownership of existing
PPE:
Additions
Improvements or betterments
Replacements
Repairs
Rearrangement cost
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Additions
• Modifications or alterations which increase the physical size or capacity of the
asset, and are of two types:
An entirely new unit
An expansion, enlargement or extension of the old asset
• In either case, the cost is capitalized.
• Cost of an addition of new unit is depreciated over the useful life.
• Cost of an expansion should be depreciated over the useful life of the expansion or
remaining useful life of the asset of which it is part, whichever is shorter.
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Improvements or Betterments
• Modifications or alterations which increase the service life or the capacity
of the asset.
• May represent replacement of an asset or part thereof with one of a better
quality and such costs are normally capitalized.
• The improvements that do not involve replacement of parts are simply
added to the cost of the existing asset.
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Replacements
• Involve substitution but the new asset is not better than the old asset when
acquired.
• Replacements may be classified into three:
Replacement of the old asset by a new one.
Replacement of major parts or extraordinary repairs.
Replacement of minor parts or ordinary repairs.
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Repairs
• Expenditures used to restore assets to good operating condition upon
breakdown or replacement of broken parts.
• Extraordinary repairs are material replacement of parts, involving large
sums and normally extend the useful life of the asset, usually capitalized.
• Ordinary repairs are minor replacement of parts, involving small sums
and are frequently encountered, charged to expense when incurred.
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Rearrangement Cost
• Relocation or redeployment of an existing PPE.
• The cost of relocating existing PPE or cost of reorganizing part or all of an
entity’s operations are not capitalized but expensed as incurred.
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Accounting for Major Replacement
• If separate identification is practicable, the major replacement is debited
to the asset account, and the remaining carrying amount of the old part is
treated as a loss.
• If it is not practicable to determine the carrying amount of the replaced
part, the entity may use the cost of the replacement as an indication of the
“likely original cost” of the replaced part at the time it was acquired or
constructed. However, the current replacement cost shall be discounted.
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