PPE - EXAMPLES
Example - cost of PPE
Bungie Ltd bought a machine for R570 000 (VAT incl), prior to a 5% trade discount. Transportation costs
amount to R5 000, and an independent engineer took 5 hours (at R500 an hour) to finalise installation.
Testing of the machine cost R10 000 (the samples from this testing phase were sold off for R6 000).
In addition, mgt spent R50 000 on advertising the product; however initial demand resulted in losses of
R30 000 over first 3 months.
Required:
What is the value to capitalise?
Solution:
Costs to capitalise
-
Purchase price
Less: trade discount
Transport
Engineer
Testing phase
Advertising => specifically excluded
Initial losses => definitely not
500 000
(25 000)
5 000
2 500
4 000
486 500
Example - major inspections
Red Ltd acquired a machine for R1m. The expected useful life of the machine is 20 years, provided
that a major inspection is performed every 4 years. The estimated cost of the first inspection is
R100 000
Required:
What would (a) depreciation be each year based on above and (b) what is impact if the inspection is
performed at end of year 3 (cost is R100 000)
Solution:
(a) Depreciation per year is calculated as follows:
Machine
Inspection costs
(b)
45 000
25 000
70 000
[900 000/20 yrs]
[100 000/4 years]
Disclosure would look like this
Carrying amount at beginning (of year 3)
Cost
Acc depr
[70 000 * 2 ]
Capitalisation of inspection costs (new)
Derecognition of initial inspection costs
Depreciation
Carrying amount at end (of year 3)
Cost
Acc depr
860 000
1 000 000
(140 000)
[100 000 - (25 000 * 3)]
[140 000 - (25 000 *3) + 70 000]
100 000
(25 000)
(70 000)
865 000
1 000 000
(135 000)
Example - deferred settlement terms
Blue Ltd purchases a machine for R1m, but due to cash constraints, the seller allows the company to
pay the machine in one year's time when normal credit terms are only 3 months (a fair discount rate is
10% pa before tax)
PPE
Solution:
Cost of machine is
[1 000 000 / 1.10]
Interest recognised over the year
[1 000 000 - 909 091]
909 091
90 909
Page 1 of 5
Example - exchange of assets
Halo Ltd exchanges a machine with Chief Ltd. The respective info for each machine is:
Halo
Chief
10 000
15 000
Carrying amount
Fair value
16 000
Solution:
(a) Halo will recognise the new machine at a cost of R15 000 => FV of item GIVEN UP
(b)
If Chief's machine is considered more relevant than Halo's then would recognise new machine in
Halo's books at R16 000
(c)
If its not possible to determine the fair value of either machine then new machine would be recognised
in Halo books at R10 000
(d)
If transaction lacks commercial substance then new machine will also be recognised at R10 000
Example - depreciation methods
Cost of equipment
Residual value
Useful life (in years)
500 000
20 000
4
Required:
Determine depreciation using (a) straight line, (b) reducing balance and (c) sum of digits
Solution:
(a) Straight line
(b)
(c)
Reducing balance
Sum of digits
[(500000-20000)/4 yrs]
120 000
Year 1
Year 2
Year 3
Year 4
[(500000-20000)/4 yrs]
120 000
90 000
67 500
50 625
Year 1
Year 2
Year 3
Year 4
[(500000-20000)/10*4]
[((500000-20000)-120000)/4 yrs]
[((500000-20000)-120000-90000)/4 yrs]
[((500000-20000)-120000-90000-67500)/4 yrs]
[(500000-20000)/10*3]
[(500000-20000)/10*2]
[(500000-20000)/10*1]
192 000
144 000
96 000
48 000
Example - revaluation : gross v net
Information applying to a machine of Master Ltd:
Cost price (on 1 Jan 2000)
Acc depr to 31 Dec 2001
Useful life (in years, straight line method)
Year end
100 000
20 000
10
Dec
At the beginning of 2002 the machine was revalued at a net replacement value of R120 000
Show the effect of this revaluation using (a) gross method and (b) net replacement method
Solution:
(a) Revalued amount
Acc depr
Revised carrying amount
Revaluation surplus (equity)
(b)
Revalued amount
Acc depr
Carrying amount
Revaluation surplus (equity)
PPE
[120000/8*10]
[150000/10*2]
[120000 new value - 80000 carrying amt]
150 000
(30 000)
120 000
40 000
120 000
120 000
40 000
Page 2 of 5
Example - revaluation : gross v net
Company purchased PPE 4 years ago for R100 000, which was being depreciated over 10 years. At the
end of year 4, the company decides to revalue PPE. The carrying amount then was R60 000 and the net
replacement cost was considered to be R75 000
Show the journal entries and disclosure of this revaluation using (a) gross method and (b) net replacement
method
Solution:
(a) Revised gross replacement cost
Acc depr
Journal entries:
Dr
PPE
Cr
Cr
(b)
125 000
50 000
[75000/6yrs gone*10 yrs total]
[125000/10yrs*4yrs]
25 000
Acc depr
Revaluation surplus
10 000
15 000
Journal entries:
Dr
PPE at revalued amount
Dr
Acc depr
Cr
PPE at cost
Cr
Revaluation surplus
75 000
40 000
100 000
15 000
Disclosure:
Carrying amount at beginning of year (year 4)
Cost
Acc depr
Gross
70 000
100 000
(30 000)
Net
70 000
100 000
(30 000)
Revaluation
Depreciation - year 4
15 000
(10 000)
15 000
(10 000)
Carrying amount at end of year (year 4)
Gross carrying amount
Acc depr
75 000
125 000
(50 000)
75 000
75 000
-
(12 500)
(12 500)
62 500
125 000
(62 500)
62 500
75 000
(12 500)
Depreciation - year 5
[125000/10yrs] and [75000/6yrs]
Carrying amount at end of year (year 4)
Gross carrying amount
Acc depr
Example - subsequent revaluations
A machine with a cost of R200 000 and a useful life of 8 years was acquired at beginning of 2004. The
machine is revalued every 2 years. The net replacement values are as follows:
Begin
-
2006
2008
2010
160 000
95 000
50 000
Solution:
Cost
Depr
2004
[200000/8yrs]
2005
[200000/8yrs]
Carrying value at end of 2005
Revaluation increase - go via revaluation surplus (equity)
Revised carrying value at beginning of 2006
Depr
2006
[160000/6yrs]
2007
[160000/6yrs]
Carrying value at end of 2007
Revaluation decrease
Revised carrying value at beginning of 2008
Depr
2008
[95000/4yrs]
2009
Carrying value at end of 2009
Revaluation increase
Revised carrying value at beginning of 2010
Note 1
Note 2
Note 3
200 000
(25 000)
(25 000)
150 000
10 000
160 000
(26 667)
(26 667)
106 667
(11 667)
95 000
(23 750)
(23 750)
47 500
2 500
50 000
Notes
1
This goes to revaluation surplus in changes in equity
PPE
2
R10 000 of the decrease goes against the revaluation surplus and the balance of R1 667
goes to income statement
3
R1 667 will go to income statement as income and the remaining R833 will to a revaluation
surplus (equity)
Page 3 of 5
Example - revaluations and deferred tax
MS Ltd extract from TB at 31 Dec 2005 shows:
Dr
10 000 000
Land at cost (1 Jan 2001)
Buildings
at cost (1 Jan 2001)
acc depr to 31 Dec 2004 (5% depr pa straight line)
Equipment
at cost (1 Jan 2001)
acc depr to 31 Dec 2004 (10% depr pa straight line)
Deferred tax (balance sheet) - 31/12/04 [all due to equipment]
Cr
21 000 000
4 200 000
18 000 000
7 200 000
2 088 000
Additional info:
(1) Tax rate is 29%; where applicable CGT is applicable
(2) Building allowance for wear and tear is 5% pa straight line
(3) Equipment wear and tear is 20% pa straight line
(4) Tax value of equipment at 31 Dec 2004 = R3.6m
(5) PPE is revalued every 4 years and has yet to be done in 2005 - revaluations apply from beginning
of the year
(6) Gross replacement costs on 1 Jan 2005 are:
Land
Buildings
Equipment
(7) Useful lives have not changed and residual values are negligible
(8) NDR reserves are only realised when asset is sold/disposed of
(9) Company discloses revaluations using the net replacement method
18 000 000
30 000 000
24 000 000
Show the calculations for determination of revalued amounts to disclose as well as the new deferred
tax balance at 31 Dec 2005
Solution:
Land:
CV at 31/12/04
Revaluation
CV at 31/12/05
Total
Revaluation
HC
TV
Diff
10 000 000
-
10 000 000
10 000 000
-
D/tax (BS)
-
8 000 000
8 000 000
-
-
8 000 000
18 000 000
8 000 000
10 000 000
10 000 000
8 000 000
1 160 000
1 160 000
[8000000*50%*29%]
Acc V > Tax V = originating = cr
Note:
-
Deferred tax on land is ALWAYS at CGT rate as you can only ever sell it
-
It’s the revaluation that gives rise to the deferred tax
Building:
CV at 31/12/04
Revaluation
Total
Revaluation
HC
TV
Diff
16 800 000
-
16 800 000
16 800 000
-
-
7 200 000
7 200 000
-
-
7 200 000
2 088 000
Depr
(1 500 000)
CV at 31/12/05
22 500 000
(450 000)
6 750 000
(1 050 000)
(1 050 000)
15 750 000
15 750 000
(450 000)
6 750 000
D/tax (BS)
(130 500)
1 957 500
[6750000*29%]
Acc V > Tax V = originating = cr
Note:
-
Deferred tax on a building is usually at the tax rate since its how you USE the asset that determines the tax
rate to use for deferred tax purposes => BUT please note if this was an admin building there would be no
deferred tax as its exempt
-
Net replacement value to revalue to is calculated as follows:
30 000 000
Gross replacement
20
Total useful life (in years)
6 000 000
Therefore acc depr to 31 Dec 2004 would have been
24 000 000
Therefore net replacement value
-
Revaluation calc = 24000000 - 16800000
-
Depreciation is:
-
1 500 000
Total column
[24000000/16yrs]
Revaluation
[7200000/16yrs]
HC
[16800000/16yrs]
1 050 000
TV
[21000000/20yrs]
1 050 000
450 000
The opening tax value = historic value because SARS and accounting rate the same
Equipment:
CV at 31/12/04
Revaluation
Total
Revaluation
HC
TV
Diff
10 800 000
-
10 800 000
3 600 000
7 200 000
2 088 000
3 600 000
3 600 000
-
-
3 600 000
1 044 000
Depr
(2 400 000)
CV at 31/12/05
12 000 000
(600 000)
3 000 000
(1 800 000)
9 000 000
(3 600 000)
-
D/tax (BS)
1 200 000
348 000
12 000 000
3 480 000
[12000000*29%]
Acc V > Tax V = originating = cr
PPE
Page 4 of 5
Note:
-
Net replacement value to revalue to is calculated as follows:
Gross replacement
24 000 000
Total useful life (in years)
10
Therefore acc depr to 31 Dec 2004 would have been
Therefore net replacement value
-
Revaluation calc = 14400000 - 10800000
-
Depreciation is:
-
9 600 000
14 400 000
Total column
[14400000/6yrs]
Revaluation
[3600000/6yrs]
HC
[10800000/6yrs]
1 800 000
TV
[18000000/5yrs]
3 600 000
2 400 000
600 000
The opening tax value = historic value because SARS and accounting rate the same
Deferred tax balance at end of 2005
Land
1 160 000
Buildings
1 957 500
Equipment
3 480 000
6 597 500
Income statement movement in deferred tax
[6597500-land rev1160000-building rev2088000-equip rev10440000-opbal2088000]
217 500
Revaluation surplus (equity) is calculated as follows:
Land
[8000000-1160000]
6 840 000
Buildings
[7200000-2088000]
5 112 000
Equipment
[3600000-1044000]
2 556 000
14 508 000
PPE
Page 5 of 5