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The way to treat costs incurred in the acquisition of a new plant
When the decision and commitment was made to purchase the plant, the company acquired an asset whose the purchase cost will be equivalent to the amount that will be paid; the purchase price should be capitalized as a whole however there are other associated costs that have to be capitalized with the product as they relate directly to the product. In this case an order was placed on 1st November and payments made; this indicate that come the end of the year accounts, the balance sheet will show the increased asset and the cash flow will show this amount as an investing activity.
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To attain the products to the company, there are some legal charges that needed to be incurred, the charges have only been incurred for the initial acquisition of the product, thus in the event that the product was not bought, then the costs would not have been incurred. The freight costs and customs duty estimates of AUD $150,000, should form part of the asset value; in the books of account the figure should be capitalized with the asset that it came with, the same figure will be included in the cash flow when accounting for the investing activities. Although freight costs and customs duty of AUD $150,000 are expenses, they are not accounted for in the trading account as they are capital expenses thus do not quality to form part of the companies allowable.
The Goods and Services Tax (GST) at the rate of 10% as will be incurred when clearing the commodity forms part of the product but it should be noted that the amount is not supposed to be capitalized since it will be claimed from the Australian Taxation authority as an input tax, the system of Goods and Services Tax (GST) follows the value added system where the costs incurred are claimed against the output taxes from the company. the amount will not appear in either cash flow statement, balance sheet, or the trading account as it will have been handled by the value added system in operation.
The amount of AUD $25,000 that related to the insurance costs that will be incurred when transporting the plant will be treated as a cost directly attributed to the plant; the treatment will thus call for capitalization of the cost. When a cost has been capitalized, then it should not be in the trading profit and loss account but will form part of the assets in the accounts. Again when drawing the cash flow statement, the amount will be accounted for in the investments made part where it will explain the reduction in cash for the period.
The transport cost from Port Kembla harbor to our factory at $10,000 forms part of the cost of the product, the cost has bee incurred solely for the product thus the it should be capitalized. As indicated the amount to be capitalized is the amount net of Good and Services Tax. When a cost has been capitalized, then it should not be in the trading profit and loss account but will form part of the assets in the accounts. Again when drawing the cash flow statement, the amount will be accounted for in the investments made part where it will explain the reduction in cash for the period. The Good and Services Tax paid on the service should be treated as an input that will be claimed against outputs in the same period as required by Australian Good and Services Tax regulations.
The plant will require an engineer to fix it to the best operation rate, the cost incurred as a result will be treated as a capital cost since it is expected to be a onetime cost that will not recur; when calculating the amount to capitalize, and the management should include the $15,000 cost of the engineer. The Good and Services Tax paid on the service should be treated as an input that will be claimed against outputs in the same period as required by Australian Good and Services Tax regulations
The useful life of the plant has been estimated by the manufacturer to be 20 years; this is important to calculate the depression amount that will be expensed every accounting period; the depreciation will be based on the all capitalized costs, for taxation purposes, depreciation is not allowable.
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In the accounting books, the old plant will not be shown as it will have been disposed, the cash book will show an increase in cash by 25,000, and the plants account will have a credit of $475,000. At the disposal, there was a loss of $50,000, this amount will be shown in the trading profit and loss account but for taxation purposes it is not an allowable.
Internationally accepted standards to account for acquisition of hardware and software
The hardware is a fixed asset to the company thus it needed to be capitalized; the amount $20,000 exclusive of Goods and Services Tax should form part of the capitalization amount. When accounting for the amount , it should only be shown in the balance sheet and cash flow statement. Depreciation should be gauged on the lifetime of the product, when making taxation returns, the amount of depreciation is not an allowable expense.
The software of integrated accounting system expected to last for five years at $6,000 is an intangible asset to the company thus it should be capitalized and amortized according to the companies amortization policy.
The cost of installation at by software developer of $2,000 should be capitalized with the software; when amortizing the cost of the software, the company should add the cost incurred to develop and laying the software.
After the installation, there is some documentation that compromised of manuals and training materials at $3,000, this cost is not directly related to the cost of the system thus it should not be taken as a capital cost; it is normal expenses of the company that should be expensed through the trading profit and loss account. Such costs are allowable for taxation processes; it is likely to reduce the taxation liability of the company.
The cost of $3,000 exclusive of Goods and Services Tax, incurred as initial training costs of the system should be treated like any other revenue expense. As a revenue expense, the amount incurred for initial staff training on how to use the system should be debited in the trading profit and loss account. For taxation purposes, the amount is an allowable expanse, Goods and Services Tax paid on the service will be an input tax claimable from its matching output tax.
