Reference no: EM133003410
Sunny plc acquired a piece of machinery at the beginning of its financial year in January 2015 for Rs 250,000 to be used in the business for 7 years. It is the company's policy to depreciate the asset at the rate of 10% p.a using the straight line method of depreciation. Prevailing technological changes in 2017 adversely impacts on the value of the asset. The selling price of the asset at that date is 125,000. Additional selling costs of Rs 5000 will need to be incurred for the sale of the asset.
At 31 December 2017, details concerning the net cash flows of the asset over the next 4 years are as follows:
2018 - 75,000
2019 - 60,000
2020 - 50000
2021 - 35000
a. The prevailing discount rate is given at 15%.
(i) Calculate NBV.
(ii) Calculate any impairment loss that may arise from this technological change.
(b) The following information are available for 2 projects that Corona Ltd has embarked on in line with its expansion plan.
Project A
Cost of Rs 80,000 was incurred in substantially improving an existing project with a view to making it safer and with fewer side effects. Tests were still ongoing at 30 June, but it was hoped to market the product in time for Christmas 2019. In addition to the above Rs 80,000, a special analysis machine has been purchased costing Rs 50,000, which has a useful life of four years with a residual value of £ 10,000. This will be used to carry out a range of research activities over its useful life.
Project B
The company has spent Rs 60,000 investigating possible alternative raw materials with similar properties that it could use instead of a special type of charcoal. It also purchased a machine to assist in analysing the properties of various alternative materials, for Rs 30,000. It is the company's intention to spend another two years researching into this field. At the end of this time, if the search for an alternative to the special charcoal has not proved fruitful, it will research into making that charcoal safer to use.
Required:
Discuss how the expenditure on Projects A and B would be dealt with in the company's accounts for the year to 30 June 2019, and justify your decisions.