Purchase a new machine 2 events should be reflected in the Financial statements

1. Purchase a new machine
Prepared By Faten Al Joaid - Certified Auditor- LACPA

2. Example:
Note 2 – Purchase of new machine
On 1 April 20X6, Gamma purchased a machine from a foreign supplier.
The cost of the machine was 900,000 dinars.
Gamma paid this amount to the supplier on 30 June 20X6. The
estimated useful life of the machine at 1 April 20X6 was eight years.
However, the machine contains a component which will need replacing
after four years.
On 1 April 20X6, the directors of Gamma estimated that 30% of the
original cost of the machine was attributable to this component.
Relevant exchange rates (dinars to $1) were as follows:
Prepared By Faten Al Joaid - Certified Auditor- LACPA

3. Example:
Note 2 – Purchase of new machine
• Date Exchange rate (dinars to $1)
1 April 20X6 3
30 June 20X6 2·5
31 March 20X7 2·4
Gamma uses the cost model to measure all of its property, plant and
equipment.
Prepared By Faten Al Joaid - Certified Auditor- LACPA

4. Required: Using the information in notes 2 explain and show how the two events would be reported
in the financial statements of Gamma for the year ended 31 March 20X7.
New machine
Cost = 900,000
Dinars
Gamma paid on
30 June 2016
Estimated useful
life = 8 years on 1
April 2016
Contain a
component = 30%
from original Cost
Cost model to
measure it
From foreign
supplier
Non monetary
item
Prepared By Faten Al Joaid - Certified Auditor- LACPA

5. Required: Using the information in notes 2 explain and show how the two events would be reported
in the financial statements of Gamma for the year ended 31 March 20X7.
New machine
Cost = 900,000
Dinars
Gamma paid on
30 June 2016
Estimated useful
life = 8 years on 1
April 2016
Contain a
component = 30%
from original Cost
Cost model to
measure it
From foreign
supplier
Non monetary
item
The machine would originally be recognized in the financial statements on 1 April 20X6 using the rate of exchange in
force at that date (3 dinars to $1).
Therefore the initial carrying amount of the machine would be $300,000 (900,000/3).
This will also be the initially recognized amount of the associated liability.
Prepared By Faten Al Joaid - Certified Auditor- LACPA

6. Note 2 – Purchase of new machine
New machine
Cost = 900,000
Dinars
CA = 900,000/ 3=
$300,000
Gamma paid on 30
June 2016
900,000/ 2.5 =
$360,000
Estimated useful
life = 8 years on 1
April 2016
Dep
Contain a
component = 30%
from original Cost
Dep
Cost model to
measure it
From foreign
supplier
The differ is = $60,000 exchange loss – P or/L we classified as operating Expenses
Prepared By Faten Al Joaid - Certified Auditor- LACPA

7. Note 2 – Purchase of new machine
New machine
Cost = 900,000
Dinars
Gamma paid on
30 June 2016
Estimated useful
life = 8 years on 1
April 2016
Contain a
component = 30%
from original Cost
Cost model to
measure it
From foreign
supplier
Non monetary
item
Non monetary item – under cost model – CA will not be affected by future currency fluctuations
Prepared By Faten Al Joaid - Certified Auditor- LACPA

8. Note 2 – Purchase of new machine
New machine
Estimated useful
life = 8 years on
1 April 2016
$300,000 – $90,000=
$210,000
Contain a component =
30% from original Cost
$300,000 x 30%
= $90,000
the machine contains a
component which will
need replacing after four
years
Depreciation needs to be accounted for by splitting the asset into two Depreciable Components.
Prepared By Faten Al Joaid - Certified Auditor- LACPA

9. Note 2 – Depreciation of Purchase of new machine
New machine
Estimated useful
life = 8 years on
1 April 2016
$300,000 – $90,000=
$210,000
Dep= $ 210,000 x 1/8
=$26,250
Contain a component =
30% from original Cost
$300,000 x 30%
= $90,000
Dep =$90,000 x ¼
=$22,500
Depreciation needs to be accounted for by splitting the asset into two depreciable components.
The closing carrying
amount of the asset which
will be included as a non-
current asset within PPE
will be $251,250 =
($300,000 – $22,500 – $26,250).
Prepared By Faten Al Joaid - Certified Auditor- LACPA