Fixed Asset

Question 1

An entity purchased new machinery from a supplier before the entity’s year-end. The entity paid freight charges for the purchased machinery. The entity took out a loan from a bank to finance the purchase. Under IFRS, what is the proper accounting treatment for the freight and interest costs related to the machinery purchase?

Answer 1

The costs to buy equipment, along with the costs to bring it to its location for use and make it ready for use, are capitalized into the cost of the equipment. Any interest costs in financing the purchase of equipment (which is otherwise ready to use) are finance (interest) costs and are expensed.

Note: If interest costs are incurred for the construction of an asset then you can capitalize, however since in this case it is used to “finance” the purchase then you would expense the interest

Question 2

DDB DOES NOT USE SALVAGE!!! DDB DOES NOT USE SALVAGE!! DDB DOES NOT USE SALVAGE!!! DDB DOES NOT USE SALVAGE!! DDB DOES NOT USE SALVAGE!!

Answer 2

DDB DOES NOT USE SALVAGE!!! DDB DOES NOT USE SALVAGE!! DDB DOES NOT USE SALVAGE!!! DDB DOES NOT USE SALVAGE!! DDB DOES NOT USE SALVAGE!!

Question 3

A company acquired an aircraft for $120 million, with the cost consisting of the airframe, $60 million; the engine, $40 million; and other components, $20 million. The company applies the cost model and uses the straight-line method of depreciation. The aircraft has a total estimated useful life of 20 years and no residual value. The estimated useful lives of the components are as follows:

Airframe 20 years
Engine 16 years
Other components 4 years

Under IFRS, what amount should the company record as annual depreciation expense?

Answer 3

IFRS requires component depreciation. Separable parts of property, plant, and equipment need to be separately depreciated. Depreciation for the plane needs to be based on three separate annual amounts, added together:
10,500,000 depreciatoin