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GDB No: 01

HRSS Engineering Limited - a multinational company working in Pakistan is principally engaged in providing engineering and operational support services to its Pakistani customers and various European countries as well. It works for projects related to Energy, manufacturing, construction and plant maintenance. Company is enjoying strong market reputation owing to its excellent quality services and prompts responses towards its customers.

Recently, HRSS has received an order from one of its client Melto Ltd. (engaged in power sector) to develop a newly designed Heat Recovery Steam Generator. Before going into its manufacturing, HRSS has to conduct a laboratory research and build a prototype for Melto. Upon the successful demo, its commercial production would be started to execute the order.

To finance this Research & Development activity, HRSS incurred a total budget of Rs. 1.0 million. Following costs were incurred by the company in pursuance of its research and development:

  • Rs 200,000 were paid to the researchers engaged in the research process. Whereas, administration cost incurred to supervise this phase was Rs. 100,000.
  • Material of Rs. 400,000 was purchased for developing the prototype.
  • First model was tested at a cost of Rs. 150,000 to ensure that it operates properly according to the customer’s demand. Meeting was called and expert engineers were invited for introduction of new product. Total cost incurred for this purpose was Rs. 75, 000.
  • A prototype was tested in the controlled environment to check customers’ acceptance for the design at a cost of Rs. 150,000. Sample was proved to be acceptable by customers.

 

Required:

1.   Determine research cost incurred on the project.                                                  (0.50)

2.   Determine development cost associated with the project.                                      (0.50)

3.   Which cost needs to be capitalized as per IAS 38?                                               (0.50)

4.   Give arguments in support of your answer in 3 above in the light of IAS 38.           (0.50)

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Replies to This Discussion

Saim Rao bro 3  one is why nil

and 2Q ka ans 775000 hai apka 70000 kaisy aya please reply

3 me ye btana hai k konsi cost capitalized hai

or 4 me usko justify krnahi hai k kio kia hai

Meeting was called and expert engineers were invited for introduction of new product. Total cost incurred for this purpose was Rs. 75, 000.

This cost is not included in development cost bcoz this amount is an independent cost.

i know but capitalized cost nil q hai i think development cost should be capitalized
tell me if i am rong

Capitalizing costs is an attempt to follow the Matching Principle of accounting. The Matching Principle seeks to match expenses with revenues. In other words, match the cost of an item to the period in which it is used, as opposed to when the cost was incurred. As some assets have long lives and will be generating revenue during that useful life, their costs may be amortized over a long period.

An example of this would be costs associated with constructing a new factory. The costs associated with building the asset (including labor and financing costs) can be added to the carrying value of the fixed asset on the balance sheet. These capitalized costs will be recognized in future periods, when revenues generated from the factory output are recognized.

1-Determine research cost incurred on the project.   

paid to the research engaged+Administration cost

=2,00,000+1,00,000

=3,00,000

2.   Determine development cost associated with the project.  

=4,00,000+150,000+75,000+150,000

=775,000

3.   Which cost needs to be capitalized as per IAS 38?      

(i)- Reseach engaged                                        200,000

(ii)- Administrative cost                                    100,000

(iii)- Total incurred for this purpose                 75,000

4.   Give arguments in support of your answer in 3 above in the light of IAS 38.     

Is ka answer mai ye btana h k jo question ap ny kia h 3 wala usy capitalize q kia h IAS 38 k accordingly ap ny is question ka answer krna h with solid reason ... k aisa q hwa h ... 

IS it right???????????

no it is not ri8.......

75000 will not be included in development cost. ri8 answer is 700000.

4. ka answer ye hoga.

According to IAS 38, all costs should be expended incurred in the period that intangible asset arise, Thus there are no costs to be capitalized.

For more detail plz read handouts on page no.37

Recognition of an Expense

• All expenditure related to an intangible which does not meet the criteria for recognition either as an identifiable asset or as goodwill arising on an acquisition should be expensed as incurred. The IAS gives examples of such
expenditure.

a) Start up Costs
b) Training Costs
c) Advertising Costs
d) Business Relocation Costs

Capitalizing costs is an attempt to follow the Matching Principle of accounting. The Matching Principle seeks to match expenses with revenues. In other words, match the cost of an item to the period in which it is used, as opposed to when the cost was incurred. As some assets have long lives and will be generating revenue during that useful life, their costs may be amortized over a long period.

An example of this would be costs associated with constructing a new factory. The costs associated with building the asset (including labor and financing costs) can be added to the carrying value of the fixed asset on the balance sheet. These capitalized costs will be recognized in future periods, when revenues generated from the factory output are recognized.

1. Determine research cost incurred on the project

Research cost incurred on the project.                                Rs. 000

Research process cost                                                             200

Administrative expenses                                                          100

Total                                                                                          300 

2. Determine development cost associated with the project

Development cost associated with the project          Rs. 000

Material Cost                                                                 400        

Testing Cost  (150,000 + 150,000)                               300

Total                                                                               700

3. Which cost needs to be capitalized as per IAS 38?

 According to IAS 38, Research cost will always be expensed because at this very early stage, it is not probable whether expenses would give benefits to entity or not.

Development cost can be capitalized only if it fulfills following conditions.

o       If cost is directly attributable.

o       To preparing the asset for its intended use &

o       It is probable that benefits will flow to entity from cost made.


4. Give arguments in support of your answer in 3 above in the light of IAS 38
If cost is directly attributable

It means cost must be directly consumed on asset. Any indirect expenses like general or selling cost must be excluded.

To preparing the asset for its intended use

Expenses made must be for preparation of asset with due care that preparation is for intended use of asset. Asset may be constructed for sale, production etc.

It is probable that benefits will flow to entity from cost made

It means that six condition lays down in Para 57 of IAS 38 must be fulfilled. If any single stipulation is not followed then cost will be expensed.

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