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Calculation of tangible asset cost

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FR Exams › Calculation of tangible asset cost

  • This topic has 4 replies, 2 voices, and was last updated 1 year ago by dangkhoa.nhhtd.
Viewing 5 posts - 1 through 5 (of 5 total)
  • Author
    Posts
  • March 3, 2024 at 7:05 pm #701869
    dangkhoa.nhhtd
    Participant
    • Topics: 49
    • Replies: 33
    • ☆☆

    Hello Tutor,

    I have a question related to the following question. How can the solution include in the calculation of the building cost the costs of purchasing piece of land? It’s wierd as piece of land is another asset that cannot be depreciation. When we include it in the cost of building, how can we depreciate it later?

    Thank you!

    An entity started construction on a building for its own use on 1 April
    20X7 and incurred the following costs:
    $000
    Purchase price of land 250,000
    Stamp duty 5,000
    Legal fees 10,000
    Site preparation and clearance 18,000
    Materials 100,000
    Labour (period 1 April 20X7 to 1 July 20X8) 150,000
    Architect’s fees 20,000
    General overheads 30,000
    –––––––
    583,000
    –––––––
    The following information is also relevant:
    • Material 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 on materials
    as a result of faulty design work.
    • As a result of these problems, work on the building ceased for a
    fortnight during October 20X7 and it is estimated that approximately
    $9 million of the labour costs relate to this period.
    • The building was completed on 1 July 20X8 and occupied on 1
    September 20X8.

    You are required to calculate the cost of the building that will be included in tangible non-current asset additions.

    March 9, 2024 at 8:21 am #702483
    P2-D2
    Keymaster
    • Topics: 4
    • Replies: 7163
    • ☆☆☆☆☆

    You are correct that land is not depreciated as it has an infinite life but it is still capitalised as part of the cost of the non-current asset (PPE). Without the land then we cannot have the building that sits upon it, so the land is helping the business generate future economic benefits and hence is capitalised.

    Thanks

    March 9, 2024 at 10:25 am #702505
    dangkhoa.nhhtd
    Participant
    • Topics: 49
    • Replies: 33
    • ☆☆

    Hello tutor.

    Thank you so much for your explanation!

    I totally agree with you that the capitalisation of land is necessary. So it means that at year end, we depreciate the building cost, to which the land cost belongs?

    I just thought that land price will be capitalised as one item in Non-current assets of balance sheet and seperated from the building cost. Is it correct?

    Thank you tutor!

    March 17, 2024 at 9:00 am #703101
    P2-D2
    Keymaster
    • Topics: 4
    • Replies: 7163
    • ☆☆☆☆☆

    Yes, the land and buildings will be capitalised as one on the SFP but then when calculating the depreciation we just need to ensure that we only depreciate the buildings.

    Thanks

    March 17, 2024 at 9:04 am #703103
    dangkhoa.nhhtd
    Participant
    • Topics: 49
    • Replies: 33
    • ☆☆

    I got it. Thank you tutor!

  • Author
    Posts
Viewing 5 posts - 1 through 5 (of 5 total)
  • The topic ‘Calculation of tangible asset cost’ is closed to new replies.

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