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A theme park purchased a new, exciting ride and financed it through the manufacturer. The following facts pertain:
Purchase price $800,000
Delivery cost50,000
Installation cost70,000
Cost of trial runs40,000
Interest charges for first year60,000
The straight-line method is to be used. Compute the depreciation on the equipment for the first year assuming an estimated service life of5 years.
A $160,000
B $184,000
C $192,000
D $204,000
The correct answer is: C $192,000
Answer C is the right option cause interest charges expensed not capitalized according to US GAAP .
B. $184,000
The cost of an asset based on IAS16 PPE cost measurement entails the cost price (purchase price), delivery cost, and Installation cost in this particular question. The cost of trial runs and interest will be expensed in the income statement. The interest cost will have been added if the interest is associated or being a borrowed amount specifically to acquire that asset.
Purchase price800,000
Delivery cost 50,000
Installation Cost 70,000
920,000
Depreciation =920,000/4 = $184,000
The cost to be capitalized:
Purchase Price 800,000/-
Delivery Cost 50,000/-
Installation Cost 70,000/-
Cost of Trial Runs 40,000/-
Total Cost 960,000/-
Depreciation Charge for the first year =960,000
5
=192,000/-
In this case the interest cost will not be capitalized
My answer is D. $204,000. Am i right ?
It is D $192,000 as computed below: Capitalized Cost:
Purchase price $ 800,000
Delivery cost 50,000
Installation cost 70,000
Cost of trial runs 40,000
TOTAL CAPITALIZED COST is960,000 divide5 years is192,000.
Interest Cost is not capitalized because as per IAS23 " borrowing cost" , interest cost can be capitalized but only on qualifying assets, (that takes substantial period of time to get ready for its intended use or sales). Which in here the asset do not qualify as a qualifying assets because it is purchased.
Deprecitaion will be $192,000
