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Hello again,
Really sorry to bother with my umpteen doubts, but I have this particular problem where I can’t get the logic behind it.
The question is Duggan Co from the Sep/Dec 2018 Sample question
Answer
As you see that in Working 5 they have taken the “depreciation” from the finance costs and deducted it from the actual depreciation charge.
What is the reason of doing so and why?
Lastly, how should we know that the question asking so.Thank you and have a great day!
No worries, I was only working this question the other day and I think this was the hardest bit of it as it hasn’t really been seen in any exam questions.
Duggan has capitalised the interest for the full 12 months, but should have stopped on 31 March when the asset was ready for use. It has therefore incorrectly capitalised three months of interest, which then must be recognised in finance costs instead. If you get this then you’ve done well in the question.
As they have capitalised the interest for these three months then they will also have charged depreciation for the three months too. This depreciation charge will need to be removed, which is pretty tricky and not something I’d expect many people would have done in the exam.
Thanks
Oh my! It sound so simply and easy! But sometimes the exam pressure is too much that we tend to overlook such details!
Well, I knew that 3 months interest needed to be expense but that second part was really tricky!
Chris, thanks a lot for your guidance!
Have a good day 🙂It isn’t that simple and easy, but looks it once you know the answer. If you start to struggle on something within the exam then leave it and move on.
Thanks
Hi I want to ask why we need to calculate depreciation based on interest $640000? I don’t understand that part
Hi,
This is because the interest should have been capitalised and not expensed through profit or loss. As it should have bee capitalised then we would need to have depreciated it too, hence once the amount has been taken from finance costs and included within PPE we then use this figure to work out the depreciation.
Thanks
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