Bakers Ltd purchased a machine on 1 January 2020. The following details are applicable:

Note N$
Purchase price (incl VAT) 1 805,000
Delivery costs 25,000
Installation costs 12,000
General administrative costs 2 7,500
Costs of testing 3 5,000
Pre-production costs 4 2,000
Initial operating losses 5 20,000
Advertising cost 7 50,000
926,500
Additional information
1. The purchase price of N$805,000 is only payable on 31 December 2021. The supplier of the machine does not usually allow credit for the purchase of similar machines.
2. The administrative costs are of a general and indirect nature.
3. The costs of testing comprise costs incurred to produce samples while testing whether the machine is functioning properly. Samples were sold at net proceeds of N$3,000.
4. The pre-production costs were necessary to bring the machine to the condition necessary to be able to operate in the manner intended by management.
5. The initial operating losses are attributable to the initial production of small quantities.
6. The asset was ready for use on 3 January 2020 and immediately put into use.
7. N$50,000 was spent on advertising the product to be manufactured by the machine.
8. The machine will be depreciated using the straight-line method over eight years, considering a residual value of N$50,000.
9. Assume that a liability exists to dismantle and remove the machine at the end of its useful life at a cost of N$45,000.
10. There was an unfavorable change in technological and market conditions for the machine’s product during the year. The value in use and fair value less cost to sell for the machine on 31 December 2020 amounted to N$500,000 and N$450,000 respectively.
11. An appropriate discount rate is 9% per annum.
12. Bakers Ltd is a VAT vendor. Assume all amounts are VAT Exclusive unless indicated otherwise.

Required:
a) Calculate the cost at which the asset will be recognized.
b) Calculate the carrying amount of the asset on 31 December 2020.

Answer rating: 100% (QA)

A Computation of Cost of the asset Particulars Amount Purchase price80500011... View the full answer