Madeni Limited installed a new milk processing machine that was imported from Holland and below are the costs recorded by the accountant up to the point when the machinery started running. Cost of the machinery - Ksh 7,800,000 Freight and insurance
2. Madeni Limited installed a new milk processing machine that was imported from Holland and
below are the costs recorded by the accountant up to the point when the machinery started
running.
Cost of the machinery - Ksh 7,800,000
Freight and insurance costs from Amsterdam to Nairobi – Ksh 550,000
Five years comprehensive maintenance contract cost at Ksh 450,000 per annum
Clearance costs paid to the clearing and forwarding agent - Ksh 210,000
Rebate from plant manufacturer - Ksh 620,000
Settlement discount for prompt payment at 15% of the cost net of the rebate
Initial testing costs - Ksh 345,000
Annual insurance for the machinery – Ksh 730,000
Import duties and taxes paid – Ksh 2,050,000
Monthly utility bills (water & electricity) attributable to running the new plant –
Ksh 185,000
Partitioning and fabrication costs to install the new plant – Ksh 588,000
Required:
(i) Find out the costs to be capitalized
(ii) Madeni Limited capitalized the above machinery on 1st July 2018. The asset was
deemed to have an estimated residual value of Ksh 2,000,000 and a useful life of
10 years. The machinery was thereafter sold for Ksh 6,500,000 on 31 December
2020, the last day of the accounting year of the business in order to be replaced with
a higher capacity machine. To make the sale, the Madeni Limited had to incur
dismantling costs and costs of transporting the machine to the buyer's premises.
These amounted to KSh 700,000.
Required:
Compute the profit or loss on disposal of the equipment assuming Madeni Limited
uses the
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