Sunshine Assembling Limited is engaged in assembling of sewing machines, water filters and washing machines. The company has its own distribution network across the country. Recently, the company has announced to launch a new brand of computerized and programmable sewing machine in the market. The company will import its parts from Japan and assemble it on its newly designed hi-tech plant. The machine bearing the brand name of “Mach09” will be sold through the company’s existing distribution channels. For this purpose, the company has decided to construct its own assembling plant which will not only increase efficiency of the machine but will also reduce its assembling cost to the desirable level. It has been estimated that the new project would cost exactly at Rs. 20 million. To finance this project, the company has obtained a bank loan equivalent to 70% of the project cost at 20% p. a. for the period of 2 years. The life of the plant has been estimated at 10 years with the residual value estimated at 10% of the invoice value.
The loan was sanctioned on April 1, 2004 and the company immediately placed the acquired funds in saving account with a local bank for three months at an annual return of 14%. Due to some technical issues with the plant, the installation started on August 1, 2004. But, soon after the installation started, the company has been forced to stop it for a period of 3 months owing to the non-compliance of certain environmental safety laws. On 1st January 2005, the company started installation again and continued it till its completion on August 31 in the same year. The entire loan was paid off on 31st October 2005.
On December 31, 2005, fair market value of the plant was estimated at Rs. 25 million. The company has the policy to charge full year depreciation in the year of acquisition or purchase and no depreciation in the year of disposal.
(1) Journal entries to record:
a) Borrowing cost on the plant to capitalize; (5 Marks)
b) Initial plant cost to recognize; (3 Marks)
c) Depreciation expense for the first year; & (4 Marks)
(2) Prepare depreciation schedule for the initial 5 years. (5 Marks)
(3) Plant value to be reported at the balance sheet as on 31/12/2005 (3 Marks)
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