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On 1 October 20X7 Dearing decided to upgrade the machine by adding new components at a cost of $200,000.
This upgrade led to a reduction in the production time per unit of the goods being manufactured using the machine.
How should the $200,000 worth of new components be accounted for?
A Added to the carrying amount of the machine
B Charged to profit or loss
C Capitalised as a separate asset
D Debited to accumulated depreciation
The new component increased the productivity time so definitely it will be capitalized. So C should be the right answer.
But BPP kits says its A which makes no sense.Please correct me if i am wrong.
Thanks:)You may be misinterpreting the meaning of the word “capitalised”
An asset is a capital item and to add something to that asset account is to capitalise that new amount
The cost of the upgrade does not necessarily require a new account and would only really be sensible where the upgrading element has a separate existence and maybe has a life span greater or less than the remaining life of the host asset
OK?
NB I think you should change your Avatar – the ACCA are extremely protective about their logo and would not be happy to see their acronym on your Avatar
No I mean should it be capitalised as a separate asset or include it ?
And kindly show me the ACCA rule book or any other relevant document which prohibit me from using their logo in my avatar and I will change my avatar.I won’t show you any written rule … so you carry on with your avatar
It’s just that they got very upset with me for using their logo in the period between asking their permission to use it and being granted that permission
But you carry on, no problem
As for the question – I’ve already answered it! There is no need to capitalise it as a separate asset
My previous response was in direct answer to your sentence:
“The new component increased the productivity time so definitely it will be capitalized. So C should be the right answer”
That sentence suggests that you have misinterpreted the word “capitalised” and you have therefore proposed that C is the correct answer whereas I have pointed out to you that C would only be necessary where the new components had a different estimated useful life than the host
And option A does satisfy your comment that “it will be capitalised”
OK?
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