The company received a 10% trade discount on the list price and then a further 3% discount for payment on delivery. The supplier offers three months’ credit, but ABC Ltd chose to take the settlement discount. The installation should have cost of $18,000 but ABC Ltd wasted $2,000 on installing the wrong machine supports at first. The maintenance occurred after the start of production and was required by the warranty. Both the warranty and the insurance were for one year only. Calculate the initial cost at which ABC Ltd should recognize the machine. Solution: 3.1.10 In the case of a self-constructed asset, a reliable measurement of the cost should be made. Construction cost includes the cost of raw materials, consumables and other direct costs of production (such as labour). In addition, a reasonable proportion of indirect production costs and the interest on borrowed capital to finance the production of that asset may be added, but only in so far as they relate to the period of production. Question 2 An entity started construction on a building for its own use on 1 April 2007 and incurred the following costs: The following information is also relevant: (a) Materials costs were greater than anticipated. On investigation, it was found that materials costing $10 million had been spoiled and therefore wasted and a further $15 million was incurred as a result of faulty design work. (b) As a result of these problems, work on the building ceased for a fortnight during October 2007 and it is estimated that approximately $9 million of the labour costs
The company received a 10% trade discount on the list price and then a further 3% discount for payment on delivery. The supplier offers three months’ credit, but ABC Ltd chose to take the settlement discount. The installation should have cost of $18,000 but ABC Ltd wasted $2,000 on installing the wrong machine supports at first. The maintenance occurred after the start of production and was required by the warranty. Both the warranty and the insurance were for one year only. Calculate the initial cost at which ABC Ltd should recognize the machine. Solution: 3.1.10 In the case of a self-constructed asset, a reliable measurement of the cost should be made. Construction cost includes the cost of raw materials, consumables and other direct costs of production (such as labour). In addition, a reasonable proportion of indirect production costs and the interest on borrowed capital to finance the production of that asset may be added, but only in so far as they relate to the period of production. Question 2 An entity started construction on a building for its own use on 1 April 2007 and incurred the following costs: The following information is also relevant: (a) Materials costs were greater than anticipated. On investigation, it was found that materials costing $10 million had been spoiled and therefore wasted and a further $15 million was incurred as a result of faulty design work. (b) As a result of these problems, work on the building ceased for a fortnight during October 2007 and it is estimated that approximately $9 million of the labour costs