Delivery and installation charges of £1,200 and legal fees of £800 on purchasing a machine for £20,000 were charged to the statement of profit or loss. Training for staff on using the machine cost £500, also expensed. By how much should the machine's carrying amount (cost) be increased?
Answer and explanation
Correct answer: A. £2,000
- Step 1: Cost of an item of property, plant and equipment includes the purchase price and directly attributable costs of bringing it to working condition: delivery, installation and legal fees.
- Step 2: Staff training is not directly attributable and is expensed.
- Step 3: Increase = £1,200 + £800 = £2,000.
Answer
£2,000.
Why not the others: £2,500: This includes the training cost of £500, which IAS 16 excludes from the cost of the asset. £1,200: This capitalises only delivery and installation, though legal fees directly attributable to the purchase also form part of cost. £500: This capitalises only the training cost, which is the one item that must stay an expense.
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